NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Monetary Consequences of a Free Trade Area of the Americas

Barry Eichengreen, Alan M. Taylor

NBER Working Paper No. 9666
Issued in May 2003
NBER Program(s):   IFM   ME

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.

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Document Object Identifier (DOI): 10.3386/w9666

Published: Estevadeordal, A., D. Rodrik, A. M. Taylor, and A. Velasco (eds.) Integrating the Americas: FTAA and Beyond. Cambridge: Harvard University Press, 2004.

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