Portal de Periódicos da CAPES

Introduction: Context, Issues, and Contributions

2001; Wiley; Volume: 33; Issue: 2 Linguagem: Inglês

10.2307/2673901

1538-4616

Marco Del Negro, Alejandro Hernandez-Delgado, Owen F. Humpage, Élisabeth Huybens,

Economic Theory and Policy

from the Asian financial crisis, the Russian default, and the Brazilian devaluation, Argentina's President Menem recommended that his country officially replace the peso with the U.S. dollar. Motivating this proposal was a desire to strengthen the credibility of Argentine monetary arrangements. Although Argentina had maintained a currency board since 1991, interest rate differentials between peso-denominated and dollar-denominated debt widened during periods of financial turmoil, indicating that the market perceived a significant probability of devaluation. Menem's proposal, which closely followed the successful inauguration of the European Monetary Union, stirred interest throughout the Americas, particularly in Mexico and, a year later, in Ecuador. To some, dollarization in Mexico offered a guarantee against periodic peso devaluation and seemed a reasonable adjunct to the North American Free Trade Agreement. Others, howevel^, cited four years of relatively low exchange rate volatility and a reduction in the Mexican inflation rate as support for current arrangements: an independent central bank and a floating peso. Ecuador's President Jamil Mahuad announced his intentions to dollarize in January 2000 as a means of restoring monetary credibility to a battered economy. Although 80 percent of Ecuadorian assets are already dollar denominated, the decision prompted rioting. These events illustrate the importance of a perennial question in open-economy macroeconomics: What type of monetary and exchange rate arrangements best promote the economic welfare of a country? Robert Mundell (1961) first posed the question when he attempted to define an optimal currency area (OCA). His work produced a rich debate within the economics profession (Ishiyama 1975), but seemed to have only a tangential influence on the policy debates of the 1960s and 1970s a period of limited international capital mobility. As capital mobility in