Chapter 15: Monetary Integration and Dollarization: What Are the Lessons?
Alcino F. Câmara Neto and Matías Vernengo Introduction Globalization, it is sometimes argued, diminishes the capacity for state intervention in the economy. Monetary integration and dollarization are ultimately strategies to cope with financial globalization. They are seen as a solution for high inflation countries that want to stabilize their economies and import credibility in doing so. Countries that successfully achieve macroeconomic stability are seen as trustworthy and should receive higher levels of foreign investment. Growth should naturally follow. The evidence in that respect is mixed at best. It is clear that during the 1990s levels of inflation in the periphery fell to international levels. Exchange rate based stabilization programmes were part of the story, and in that respect it seems correct to argue that greater monetary integration and less autonomy in monetary policy went hand in hand with lower inflation. However, inflation fell all around the globe, and it is not absolutely clear that the reasons for that are associated with tighter macroeconomic policies resulting from a more integrated international financial system.1 Inflation is now virtually nonexistent in industrialized countries, and generally subdued in the developing world. The victory over inflation was however bought at a high cost in terms of sluggish growth, high unemployment and income inequality in many parts of the world, giving rise to a host of economic and social problems that take their toll. The question then is whether monetary integration and dollarization are not particularly important to reduce inflation – that is, can stabilization...
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