Towards a Latin American Currency: Why a Currency Union Would Benefit the Region’s Monetary Policy

Currency devaluation and volatility of currencies in Latin America have consistently been a problem for economies in this region, resulting in systemic inflation and hindered foreign trade. There has been much debate recently about what a currency union would look like in Latin America, conceived by the countries there as an effort to help resolve currency devaluation and promote economic growth. This prompts the question, would Latin America benefit from a currency union? People in the past have spoken about how a currency union might not be the best policy for Latin America at the moment. They talk about how Latin America is a highly volatile region that is vulnerable to macroeconomic disturbances and has a limited fiscal capacity to respond to shocks. This paper shows what a currency union would look like in Latin America if we were to imagine a way to go beyond the political and policy roadblocks. I comment on the many advantages and disadvantages associated with dollarization, the creation of a dollar bloc, limited currency unions, and other prominent currency union’s around the world. Based on the examples of other unions from around the world, I speculate that a proper, overarching currency union might be the best method of instituting a common currency in Latin America–that is, if at all we can see beyond the political contingencies of the present.