The cost of monetary sovereignty

Carlos Encinas Ferrer


In the context of the globalization we are experiencing and the accompanying economic integration, emerging economies are facing a gradual process of remonetization to the dollar (a phenomenon known as "dollarization") during which the percentage of assets and financial liabilities in dollars or euros, compared with those in our national currency, is not only high but is also rising. This, coupled with the floating of the exchange rate of national currencies, increasingly restricts the possibilities of establishing a sovereign monetary policy. Thus, the disadvantages of having a separate currency is becoming more and more evident, affecting significantly the competitiveness of our economies. Mexico, for example, with high trade and financial integration with the United States of America and high dollarization ratios of assets and liabilities, faces marked limitations in the effectiveness of establishing autonomous monetary policies to achieve objectives of endogenous economic growth. In this paper the author presents an analysis of the costs for the country to maintain a national currency unit. Those costs are originated mainly in two areas: the costs of currency exchange and the costs for interest rate differentials associated with country risk. According to estimations made in this investigation the sum of these two types of costs in 2008 reached $ 414,774.3 million pesos, equivalent to 3.43% of GDP. Finally, it stresses the desirability of a monetary union with the United States that would allow Mexico to maintain the benefits of seigniorage and inflation tax, eliminating those costs that reduce the competitiveness of our economy


Monetary union; dollarization; exchange rate; monetary policy


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