The Viability of a Monetary Union in South America: Insights from Generalised Purchasing Power Parity Theory
Keywords:Monetary Union, South America, Generalised Purchasing Power Parity,
AbstractSouth 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.
Bayoumi, T., Lee, J., & Jayanthi, S. (2006). New Rates from New Weights. IMF Staff Papers, 53(2). Retrieved from https://www.imf.org/External/Pubs/FT/staffp/2006/02/pdf/bayoumi.pdf
Berg, A., Borensztein, E., & Mauro, P. (2003). Monetary Regime Options for Latin America. International Monetary Fund. Retrieved from http://www.imf.org/external/pubs/ft/fandd/2003/09/pdf/berg.pdf
CAF. (2015). About CAF. Retrieved from CAF Development Bank of latin America: http://www.caf.com/en/about-caf/who-we-are/
Council of Hemispheric Affairs. (2013, September 3). 21st Century Regionalism: Where is Latin America headed? . Retrieved from COHA Research: http://www.coha.org/21st-century-regionalism-where-is-latin-america-headed/
Enders, W., & Hurn, S. (1994). The Theory of Generalized Purchasing Power Parity: Tests in the Pacific Rim. Review of International Economics, 179-190.
Frenkel, R., & Rapetti, M. (2010). A Concise History of Exchange Rate Regimes in Latin America. Washington: Center for Economic and Policy Research. Retrieved from http://www.cepr.net/documents/publications/exchange-rates-latin-america-2010-04.pdf
Kenen, P. B. (1969). The theory of optimum currency areas: an eclectic view. In R. A. Mundell, & A. K. Swoboda, Monetary Problems of the International Economy (pp. 41–60). Chicago: University of Chicago Press.
McKinnon, R. I. (1963). Optimum currency areas. American Economic Review, 53, 717–725.
Mundell, R. A. (1961). A theory of optimum currency areas. American Economic Review, 53, 657-665.
OAS. (2015). Purpose. Retrieved from Organization of American States: Democracy for peace, security, and development: http://www.oas.org/en/about/purpose.asp
Peña, F. (2009, April). South American Integration, Can Unasur and Mercosur complement each other? Retrieved from http://www.felixpena.com.ar/index.php?contenido=wpapers&wpagno=documentos/2009-04-south-american-integration-unasur-mercosur
Wilson, P., & Choy, K. M. (2007). Prospects for enhanced exchange rate cooperation in East Asia: some preliminary findings from generalised PPP theory. Applied Economics, 39, 981-995. doi:10.1080/00036840500497042