Chapter 13: South–South Regional Monetary Cooperation: Potential Gains for Developing Countries and Emerging Markets
Laurissa Mühlich 13.1 INTRODUCTION The search for optimal exchange rate regimes for developing and emerging market economies has resurfaced in the wake of the late 1990s’ financial crises. It is dominated by the so-called bipolar view, in other words, the conviction that explicit exchange rate targets are difficult to defend within an international monetary system characterized by free capital movements (Fischer, 2001). This view has been questioned in recent years however: first, the “fear of floating” argument (Calvo and Reinhart, 2002) that emphasizes the destabilizing effects of currency mismatches in the case of net external debt denominated in foreign currency has put the appropriateness of free floating regimes for developing and emerging market economies into question. Second, the increased liberalization of international capital has made it difficult to maintain an exchange rate peg that is not sustained mutually by monetary cooperation or even replaced by monetary integration. In this context, exchange rate regime choice has become a choice between floating exchange rates and monetary cooperation or integration today (Eichengreen, 1994). In this chapter I aim to link the debate on available exchange rate options for developing and emerging market economies to the issue of regional monetary cooperation. Although in the case of industrialized countries optimum currency area (OCA) theory has been widely discussed (Frankel and Rose, 1997; Mongelli, 2002; Rose and Stanley, 2005), and brought beyond the original contributions of Mundell (1961) and others (McKinnon, 1963; Kenen, 1969), I argue that the debate has not yet been systematically connected...
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