Is Mercosur an Optimal Currency Area? A shock correlation perspective

President Menem’s proposal that Mercosur advances to a common currency sets up the question of whether there are economic reasons for this move. The paper researches the Mundellian idea that if shocks affecting countries in a region are symmetric there is no need to use the nominal exchange rates as an adjustment tool. By using four different methodologies, we are able to establish that shocks in Mercosur are not similar. In fact there is not identifiable pattern either of similarity or dissimilarity. The size of shocks is, however, historically much larger in Mercosur than in the EU or NAFTA, and the exchange rate has played a strong role in the adjustment process. In a final section we discuss possible additional motives for a monetary union in the region, stressing the role of the value of stability and the cost of debt. Overall, even though there might be grounds for a push towards monetary union on the small countries side, the question of why Brazil could be interested in this kind of arrangement remains largely unanswered.