Table of Contents

Monetary Integration and Dollarization

Monetary Integration and Dollarization

No Panacea

Edited by Matías Vernengo

This book deals with the economic consequences of monetary integration, which has long been dominated by the Optimal Currency Area (OCA) paradigm. In this model, money is perceived as having developed from a private sector cost minimization process to facilitate transactions. Not surprisingly, the book argues, the main advantage of monetary integration in the OCA context is the reduction of transaction costs, yet the validity of OCA to analyze processes of monetary integration seems to be limited at best.

Monetary Arrangements in a Globalizing World: An Introduction

Matías Vernengo

Subjects: economics and finance, financial economics and regulation, international economics

Extract

Matías Vernengo Introduction This book is based on a conference held at Kalamazoo College Michigan. In 11–12 May 2001, on the lessons of the European Monetary Union (EMU) for the Americas. Much of the economic analysis of moving to EMU has been undertaken within the context of the Optimal Currency Area (OCA) paradigm, based on Mundell’s (1961) seminal contribution. In that view money is viewed as having developed from a private sector cost minimization process to facilitate trading. Not surprisingly the main advantage of monetary integration in the OCA context is the reduction of transaction costs.1 Yet the validity of OCA to analyse processes of monetary integration seems to be limited at best (Goodhart, 1998). The discussions in the conference, that are partly reflected in the chapters of the book, try to go beyond the OCA model and understand the political economy of monetary integration by comparing the EMU with the dollarization (formal and informal) process in Latin America.2 Although it is clear that no consensus was reached during the conference – something that was dubbed the Kalamazoo Dissensus by one participant – it was clear for all that monetary integration, from the more loose arrangements to the more tight including Currency Boards and formal dollarization, is no panacea. The debate on monetary integration and dollarization is an extension of the debate on the appropriate exchange rate regime, but also is part of a broader discussion. The question is whether global financial integration would lead to fewer currencies and whether...