The Viability of a Monetary Union in South America: Insights from Generalised Purchasing Power Parity Theory
DOI:
https://doi.org/10.26481/marble.2016.v2.261Keywords:
Monetary Union, South America, Generalised Purchasing Power Parity,Abstract
South America has seen increased interest in interregional economic and political cooperation over the last decades. Inspired by the European Union, the Union of South American Nations (UNASUR) became the official body of regional integration in South America in 2008. Plans for a regional currency within the UNASUR have returned to the political agenda following a prolonged period of silence on the topic amid turbulences in the Eurozone. Spanning the period 1979-2012, this paper analyses the viability of a monetary union between nine UNASUR members from a generalised purchasing power parity (G-PPP) perspective. It finds evidence for a unique cointegrating relationship between the countries’ monthly real exchange rates when the period of the Latin American debt crisis is omitted. The analysis provides support for monetary integration in that it shows the region to be economically interlinked. Nevertheless, adjustments to macroeconomic shocks appear asymmetric suggesting further economic integration is necessary for a monetary union to be viable.References
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