Regional integration and macroeconomic coordination in Latin America

Abstract

The contagion aspects of the financial and exchange-rate cases in recent years demonstrate the need to extend the domain of macroeconomic policy from the national dimension to the regional one. This paper presents the main concepts and challenges behind macroeconomic policy cooperation in Latin America and the Caribbean and evaluates them from a game-theory perspective. Under certain conditions related to the debate on optimal currency areas, entering into a cooperative dynamic will be beneficial for all participants. Moreover, it is shown that because the welfare gains from regional cooperation are endogenous, cooperation win eventually become stable, even in the presence of a Prisoner’s Dilemma. Albeit promising at the subregional level, however, the initial conditions observed in Latin America are still far from the conditions of self-sustained dynamics. At the initial stage of coordination, cooperation is unstable, and a formal institutional setting is needed to start and coordinate the cooperative process. In addition, more traditional policies of trade integration should be pursued.