Regional Integration and the Issue of Choosing an Appropriate Exchange-Rate Regime in Latin America

Abstract

The optimality and feasibility of exchange-rate regimes in Latin America depends upon several parameters linked to microeconomics, open macroeconomics, and political economy aspects. More recently, the discussion has incorporated the regional dimension and the possibility of joining monetary unions to the set of feasible national strategies. According to the optimal currency area criteria, the region still does not fit all the traditional OCA conditions, but the empirical evidence presented in the document shows a more promising picture at subregional level. Non-cooperative corner solutions, either full dollarization or pure free floating implemented at purely national level, are seen as short-sighted. The paper presents a cooperative alternative to these corner solutions, arguing that joining an exchange rate coordination mechanism could improve the policymaking process and foster better macroeconomic governance at both national and regional levels.

Keywords: Exchange rate, regional integration, currency areas, macroeconomic coordination

JEL Classification: F02, F42