Is Mercosur an optimum currency area?

We find that generalized purchasing power parity does not hold for Mercosur, and thus that the South American trade group does not constitute an optimum currency area. We also find that the role of the United States cannot be neglected in the region, and that high short run volatility of real exchange rates is accompanied by slow adjustment processes of between 2 and 16 years (PPP puzzle).generalized purchasing power parity; optimum currency area; Mercosur; PPP puzzle

Is Mercosur an optimum currency area? An assessment using generalized purchasing power parity

We consider the cointegration approach of generalized purchasing power parity to show that a necessary condition for Mercosur to be an optimum currency area is met. Yet there are still large cross-country differences as to cast doubt on the success of either monetary union or official dollarization. The PPP puzzle is also found to occur in Mercosur.

Is Mercosur an optimum currency area?

We find that generalized purchasing power parity does not hold for Mercosur, and thus that the South American trade group does not constitute an optimum currency area. We also find that the role of the United States cannot be neglected in the region, and that high short run volatility of real exchange rates is accompanied by slow adjustment processes of between 2 and 16 years (PPP puzzle)