Can South America form an optimal monetary area? A structural vector autoregression analysis

Padilla, León; García-Brazales, Ángel Rodríguez

doi:10.1007/s10368-020-00490-2

Cited by 3 publications

(4 citation statements)

References 40 publications

(51 reference statements)

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“…On the other hand, the OCA theory emphasizes that the benefits of adopting a common currency are directly proportional to the level of intraregional trade; and if business cycles of the members of a monetary area are synchronized, the cost of losing the monetary policy is lower, as it is possible to use a common monetary policy. Following De Grauwe and Mongelli (2005), and Padilla and Rodríguez García-Brazales (2021), Figures 7 and 8 represent the relationship between the potential costs and benefits of adopting dollarization for each region. The costs are represented by the decomposition of variance for the prediction error of the GS obtained from the BM model and the benefits by the percentage of exports from each country to the US.…”

Section: Discussionmentioning

confidence: 99%

Reassessing the feasibility of adopting dollarization in Latin America

Padilla

2022

JEFAS

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PurposeThis paper analyses the possibility of Latin America's (LA) major economies adopting dollarization, considering that in the last decade macroeconomic instability has once again challenged the ability of certain economies to properly manage their own currency.Design/methodology/approachTo determine the feasibility of adopting the US dollar as official currency, the author uses the framework of optimum currency area (OCA) theory, since, in fact, dollarization is an incomplete monetary union. The author uses a structural vector autoregressive (SVAR) model to identify what type of structural shock — country-specific, regional or global — prevails in LA economies. For this purpose, the US output is used to represent the global output and determine how the shocks of the US influence the output trajectory of each LA nation. The higher the influence of the US product, the lower the costs of adopting the US dollar.FindingsThe results of the variance decomposition show that the influence of the US shocks in the gross domestic product (GDP) trajectory of LA countries has significantly decreased over the last two decades, even in the currently dollarized economies. The estimates for Venezuela and Argentina show that the importance of US shocks in the trajectory of their GDP is low. Therefore, the cost of adopting the US dollar as the official currency would be high.Originality/valueIn view of hyperinflation and macroeconomic imbalances in certain LA nations, the dollarization debate has resurfaced in recent years. However, the literature that empirically evaluates the feasibility of adopting dollarization as a monetary system under current economic conditions is limited.

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Section: Discussionmentioning

confidence: 99%

Reassessing the feasibility of adopting dollarization in Latin America

Padilla

2022

JEFAS

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“…Hafner and Kampe (2018) found that the countries belonging to the CAN present better homogeneity (in terms of openness and factor mobility) compared to MERCOSUR countries. In the same vein, Padilla and Rodriguez García-Brazales (2021) demonstrate that SA as a whole is not considered not an optimal monetary area. Nevertheless, the researchers identified a group of countries (comprised of Chile, Peru, Ecuador, Brazil, and Argentina) for which the costs of a hypothetical monetary union would be relatively lower.…”

Section: Introductionmentioning

confidence: 92%

Monetary integration in South America: Elección of candidates through unsupervised machine learning

Padilla

Marín²

2022

REM

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Applying Unsupervised Machine Learning techniques to a set of nominal variables (based on the optimum currency area [OCA] theory and the Maastricht Treaty criteria) and industrial indicators (based on similar production patterns), this paper aims to identify potential candidates for a monetary integration in South America (SA). The main conclusion is that, according to the clustering of the nominal and industrial indicators, the countries in best position for a hypothetical monetary integration in SA are Chile, Colombia, and Perú (and Ecuador to a lesser extent); countries that are generally members of the same cluster. This group of economies, which belong to the Pacific Alliance, are in a better position to meet various criteria for regional monetary integration, such as nominal convergence and similar production patterns.

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“…Recent applications address the OCA theory in terms of the degree of (a)symmetry of macroeconomic disturbances among potential participants. This scheme is relevant insofar as giving up an independent monetary policy to tackle macroeconomic imbalances is less costly if the candidate countries face similar shocks (Padilla & Rodríguez, 2021). Indeed, highly asymmetric shocks imply a floating exchange rate might play the corrective role of shock absorber; otherwise, the exchange rate might lead to critical macroeconomic costs (Hochreiter et al, 2003), say, large fluctuations in production and output due to the disagreement on the interest rate-setting (Staehr, 2015).…”

Section: Literature Overviewmentioning

confidence: 99%

“…First, participating countries experience lower transaction costs, reduced uncertainty, and increased policy confidence (Zhao & Kim, 2009). On the other hand, the main challenge stems from the inability to invoke independent monetary policy, which may disproportionately harm members in terms of macroeconomic stability when asymmetric aggregate disturbances prevail (Padilla & Rodríguez, 2021). To the best knowledge of the authors, no previous work has explicitly addressed this issue for the CAPADR region by using an empirical background.…”

Section: Introductionmentioning

confidence: 99%

Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries?

Baca¹

2021

Preprint

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In light of the ongoing integration efforts, the question of whether CAPADR economies may benefit from a single currency arises naturally. This paper examines the feasibility of an Optimum Currency Area (OCA) within seven CAPADR countries. We estimate SVAR models to retrieve demand and supply shocks between 2009:01 -2020:01 and determine their extent of symmetry. We then go on to compute two regional indicators of dispersion and the cost of inclusion into a hypothetical OCA for each country. Our results indicate that asymmetric shocks tend to prevail. In addition, the dispersion indexes show that business cycles have become more synchronous over time. However, CAPADR countries are still sources of cyclical divergence, so that they would incur significant costs in terms of cycle correlation whenever they pursue currency unification. We conclude that the region does not meet the required symmetry and synchronicity for an OCA to be appropiate. ResumenDados los esfuerzos de integración actuales, cabe preguntarse si las economías CAPARD pueden beneficiarse de un sistema de moneda única. Este documento analiza la factibilidad de una Zona Monetaria Óptima (ZMO) entre siete economías CAPARD. Se estiman modelos SVAR para extraer choques de oferta y demanda durante 2009:01 -2020:01 y determinar su nivel de simetría. Posteriormente, se calculan dos indicadores regionales de dispersión y el costo de incorporación a una ZMO hipotética para cada país. Los resultados sugieren que los choques de naturaleza asimétrica predominan. En adición, los índices de dispersión reflejan que los ciclos económicos muestran una tendencia creciente de sincronización. Sin embargo, los países CAPARD aún constituyen fuentes de divergencia cíclica, de forma que incurrirían en costos significativos en términos de correlación cíclica si persiguen la unión monetaria. Se concluye que la región no muestra la simetría y sincronización requeridas para que una ZMO sea apropiada.

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Can South America form an optimal monetary area? A structural vector autoregression analysis

Cited by 3 publications

References 40 publications

Reassessing the feasibility of adopting dollarization in Latin America

Reassessing the feasibility of adopting dollarization in Latin America

Monetary integration in South America: Elección of candidates through unsupervised machine learning

Shock Symmetry and Business Cycle Synchronization: Is Monetary Unification Feasible among CAPADR Countries?

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