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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.
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Chapter 11: Capital Flows to Emerging Markets under the Flexible Dollar Standard: A Critical View Based on the Brazilian Experience

Carlos Medeiros and Franklin Serrano


Carlos Medeiros and Franklin Serrano1* Introduction The purpose of this chapter is to contribute to the discussion of a number of issues concerning macroeconomic policies that should be appropriate for developing countries. We shall take into account the broader political picture of changes in the international economy, reflected objectively in terms of the nature of the balance of payments constraints facing the ‘emerging markets’ and specially the Latin American economies since the early 1990s. It is within this wider context that we present our account of the particular case of Brazil. The Brazilian experience has some peculiarities that make it an interesting testing ground for the presumed benefits of the process of financial globalization and the policies of trade and financial opening. Many will agree that the slow growth and extremely high inflation experienced in Brazil in the 1980s had much to do with debt crisis and the subsequent interruption of capital flows towards Latin America. Indeed, in what became known as the ‘lost decade’ Brazil experienced a severe balance of payments constraint that slowed growth and triggered the acceleration of inflation. Since the early 1990s, foreign capital started again flowing towards Brazil in large quantities, first mainly as portfolio capital but towards the end of the decade more and more as foreign direct investment. One could well have expected that this large amount of foreign capital would improve ‘quality’ (presumably increasingly ‘cold’ rather than ‘hot’ money), by alleviating the balance of payments constraint, and would have had a big...

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