An assessment of the case for monetary union or official dollarization in five Latin American countries

Abstract

We use a data set covering the whole period of Argentina's currency board and most of that spanned by the Mercosur trade agreement to examine the case for either a Latin American monetary union or monetary union with the USA (through official dollarization). Our econometric evidence – using VAR techniques – indicates that macroeconomic shocks are so highly asymmetric between our set of Latin American countries and the USA as to strongly question the advisability of official dollarization. As macroeconomic shocks are a little more positively correlated within our set of Latin American countries, a stronger case can be made for a Latin American monetary union. Even so, we remain rather doubtful.