Comments on S. Edwards: “Monetary unions, external shocks and economic performance: a Latin American perspective”

I discuss Sebastian Edwards’ most recent paper with great pleasure. As so much of the work of this distinguished economist, this paper provides new insights on a burning issue in international economics. Here Edwards provides empirical evidence on the resilience to external shocks of countries that lack a national currency (“monetary-union” or MU countries). The paper starts by reviewing the issues and literature relevant on exchange-rate regimes, dollarization, and MU in Latin America, with an emphasis on the question if countries in the region satisfy key optimal currency area criteria. Then the paper provides extensive new evidence on economic performance in MU countries, in comparison to countries with a national currency, using a large world panel sample. Performance tests are conducted for the comparative likelihood of MU countries of sudden stops in capital flows (SS) and large current (deficit) reversals (CAR), as well as their ability to absorb terms-of-trade shocks, SS, and CAR. The results are generally negative and significant for the comparative performance of MU countries. To set the stage, I start my comments by documenting first how country selection of exchange-rate and monetary regimes is quickly evolving in the world during the last decades, discussing subsequently how economists’ views follow suit (Section 1). Then I discuss some aspects of Edwards’ paper, focusing in particular on the data and model specification (Section 2). I end with brief implications for exchange-rate and monetary regime choice in Latin America.