Monetary Unions and Hard Pegs Effects on Trade, Financial Development, and Stability

Financial services with global reach are becoming ever more important in the conduct and organization of the trade and investment of nations, and currencies that lack international standing lose out in this business. The result of financial development has been destabilizing currency andportfolio substitution -- in favour of international currencies and against local ones.This book analyses formal approaches to overcoming monetary divisions within countries and within integrating regions, focusing on the consequences of monetary union for trade among union members and their financial development and stability. The authors discuss hard pegs such as those attempted bythe currency board of Argentina, outright dollarization, such as in Ecuador, and multilateral monetary union, as in Europe, the least reversible form of monetary union and the most powerful elixir of financial integration and trade.The political classes and central banks in most countries have been reluctant to admit the market- and technology-driven forces of currency consolidation, much less yield to them. International financial institutions too are still in the habit of proffering advice about national monetary andexchange-rate policies on the assumption that getting rid of both is not even an option. Emerging-market countries, in particular, have to choose between retaining what independent monetary means they still have -- and can safely use in the presence of widespread liability dollarization and currencymismatches -- and formally replacing the domestic with an international currency to reduce exposure to debilitating financial crises. In concrete investigations of this choice, this volume shows that monetary union deserves a much more sympathetic hearing.

Volbert Alexander is Professor of Money and Banking at the Economics Department of the University of Giessen (Germany). Prior to his appointment in 1986 he was Professor of Economics at the Universities of Trier and Siegen (Germany). From 1997 to 1999 he served as a Chief Economist and Director of Research at Hypobank in Munich. He is co-founder of a "priority" program, Monetary Macroeconomics, financed by the German Research Foundation. His main fields of interest and his current research are focused on European financial integration, monetary policy issues and problems of short-term reactions in financial markets. Jacques Melitz is currently Professor of Economics at the University of Strathclyde. Previously, he worked for many years at the Centre de Recherche en Economie et Statistique (CREST), with which he is still affiliated, and was Professor of Economics at the Institut d'Etudes Politiques in Paris. Since 1983, he has held visiting positions at Harvard and Princeton Universities, has consulted for the OECD, the European Commission, the Federal Reserve, the International Monetary Fund, the Bank of Italy and the Swedish Commission of Monetary Union. He has also been a research fellow of the CEPR since 1986. For the last couple of decades, his research has centered on international macroeconomics, most particularly European issues connected with the European Monetary System and European Monetary Union. George M. von Furstenberg for many years a titled Professor of Economics at Indiana University, is the inaugural holder of the Robert Bendheim Chair in Economic and Financial Policy at Fordham University. Work at the IMF (Division Chief in the Research Department, 1978-83) and at U.S. government agencies such as the President's Council of Economic Advisers (Senior Economist, 1973-76) and the Department of State (1989-90), alternated with his academic pursuits. His latest book projects have dealt with Regulation and Supervision of Financial Institutions in the NAFTA Countries and Learning from the World's Best Central Bankers. He joined the G8 Research Group in 1999 and in 2000 was president of the North American Economics and Finance Association focusing on integration processes in the Western Hemisphere.