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- W1994389951 abstract "Inflation Targeting in Latin America: Toward a Monetary Union? Marc Hofstetter (bio) “Convergence on regional monies is a no-brainer.” (Dornbusch 2001) On 8 April 2010, one of the co-chairs of the World Economic Forum held in Cartagena, Colombia, proposed a monetary union for Latin America. The proposal was enthusiastically received by the audience and made it to the front page of El Tiempo, Colombia’s main newspaper. In an earlier episode in the 1990s, academics and policymakers gave serious consideration to the idea of dollarizing Latin American economies. The idea was extensively discussed at the International Monetary Fund (IMF), the Inter-American Development Bank (IDB), and even at the Federal Reserve and in the U.S. Congress (IMF 1999). In fact, Ecuador and El Salvador did give up their monetary autonomy in favor of the dollar. Although proposals to form monetary unions emerge often in the Latin American context, little is known (quantitatively) about the costs and benefits of such a drastic change in the monetary regime. This paper fills part of that gap by analyzing some of the costs and benefits of a potential monetary union in the region and by comparing these with the costs and benefits of dollarization. I focus specifically on the inflation targeters in Latin America. Since the early 1990s, a growing number of industrialized and developing economies have adopted inflation-targeting (IT) regimes operated by [End Page 71] independent and more transparent central banks. Rose (2006) has labeled this a New International Monetary System—in his words, “Inflation Targeting is Bretton Woods, reversed.” In Latin America (LA), five of the main economies have adopted IT; these are Brazil, Chile, Colombia, Mexico, and Peru. These five countries collectively have a population of more than 380 million people, and make up 70 percent of the GDP of Latin America and the Caribbean (LAC). Close to three-quarters of the total trade of LAC takes place among these five countries. Since 2000 each has kept inflation in single digits, a notable achievement given LA’s inflation history over the last forty years. Asking whether these countries would be better off adopting a common currency—that is, forming a Latin American Monetary Union (LAMU)—is natural in the context of the converging monetary strategies of these five nations. My response to this first question is yes. I also analyze economic pros and cons of the unilateral adoption of the U.S. dollar by each inflation targeter in LA.1 I find that, with the exception of Brazil, these countries would be better off dollarizing than retaining monetary autonomy. My measurement of the costs and benefits of LAMU and dollarization takes into account increased volatility from giving up the use of monetary policy with countercyclical purposes and its resultant welfare losses; lost seigniorage revenue; gains in credibility; and gains in trade that, in turn, result in output gains. Having found that both monetary union and dollarization make economic sense, I then ask which of the two strategies is preferable. The results are mixed. I conclude that LAMU should be preferred to dollarization in the cases of Chile, Peru, and Brazil. The opposite, however, is true for Mexico. For Colombia, the net benefits are similar for both common currency arrangements. Moreover, in general dollarization has an edge in countries that have either strong trade links with the United States or business cycles that strongly correlate with those of the United States. In this paper I pursue a twofold strategy. On the one hand, I build a simple policy model that captures several costs and benefits for a group of IT countries considering forming a monetary union. Then, using the results from the model and from the large literature on monetary unions, I report estimates on the costs and benefits associated with LAMU and unilateral dollarization. The paper also makes a methodological contribution by proposing a way to [End Page 72] compare some of the consequences of common currencies measurable in terms of GDP (for example, consequences via increased trade or the forgone seigniorage collection) with other traditionally more intangible consequences, such as the potential increase in volatility. I use self-reported satisfaction surveys to build country-specific indifference..." @default.
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- W1994389951 date "2011-01-01" @default.
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- W1994389951 title "Inflation Targeting in Latin America: Toward a Monetary Union?" @default.
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- W1994389951 doi "https://doi.org/10.1353/eco.2011.0012" @default.
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