Working Paper: CEPR ID: DP3909
Authors: Barry Eichengreen; Alan M. Taylor
Abstract: How will free trade affect monetary policy and exchange rate regime choices in the Americas? While the European Union illustrates how the creation of an integrated market in goods and services can enhance monetary cooperation and integration, it is not clear that Europe?s experience translates to Latin America, where the political circumstances are different. We try to understand whether the monetary consequences of existing regional trade agreements, including but not limited to the European Union, mainly reflect spillovers from trade integration, or whether observed outcomes have been mainly about politics. Our results incline us toward the latter interpretation, leaving us pessimistic about the basis for deeper monetary cooperation. If exchange rate volatility is to be tamed, then the more widespread adoption of inflation targeting, which we find to be associated with a significant reduction in bilateral exchange rate volatility, may be the most promising path.
Keywords: Exchange Rates; Regional Trade Arrangements
JEL Codes: F30; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| regional trade agreements (RTAs) (F13) | monetary cooperation (E42) |
| regional trade agreements (RTAs) (F13) | exchange rate stability (F31) |
| widespread adoption of inflation targeting (E52) | bilateral exchange rate volatility (F31) |
| increased bilateral trade (F10) | exchange rate volatility (F31) |
| political dynamics in Mercosur (F55) | exchange rate volatility (F31) |
| regional trade agreements (RTAs) (F13) | exchange rate volatility (F31) |