Why Should Emerging Economies Give Up National Currencies?: A Case for "Institutions Substitution"

By Enrique G. Mendoza. 2002

275 citations recorded by the source corpus.

Financial contagion and Sudden Stops of capital inflows experienced in emerging-markets crises may originate in an explosive mix of lack of policy credibility and world capital market imperfections that afflict emerging economies with national currencies. Hence, this paper argues that abandoning national currencies to adopt a hard currency can significantly reduce the emerging countries' vulnerability to these crises. The credibility of their financial policies would be greatly enhanced by the implicit subordination to the policymaking institutions of the hard currency issuer. Their access to international capital markets would improve as the same expertise and information that global investors already gather to evaluate the monetary policy of the hard currency issuer would apply to emerging economies. Yet, adopting a hard currency does not eliminate business cycles, rule out all forms of financial crises, or solve severe fiscal problems that plague emerging economies, and it entails giving up seigniorage and potential benefits of conducting independent monetary policy. However, these disadvantages seem dwarfed by the urgent need to enable emerging countries to access global capital markets without exposing them to the risk of recurrent Sudden Stops.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/93d92f5a6ea771a0b574e5037daa0317fe67d92d

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Citations in the corpus

Measuring Acute Poverty in the Developing World: Robustness and Scope of the Multidimensional Poverty Index (2013, methodology): “Proportions are calculated over the total number of poor people in each case, considering 104 countries in the case of the MPI poor and 90 countries in the case of the income poor. Computations were done using 2007 population figures from UN (2011). Further details on the computation are described i”
Two sides to every story: measuring polarization and inequality in the distribution of work (2008, background): “In what is perhaps closest to our study, Basu and Foster (1998) pointed out that the distribution of a variable, in their case literacy, within and between households can have important externalities and proposed a measure of the distribution of literacy across households.”
Risk-Sharing and Endogenous Network Formation (2002, background): “Green et al. (1985) and Basu and Foster (1998) argue that the benefits of education are sharedwithin the same household.”
The Evolution of Social and Economic Networks (2002, background): “Such information may be as simple as an invitation to a party, or as consequential as information about job opportunities (e.g., Boorman [6], Montgomery [31], and Topa [37]), literacy (e.g., Basu and Foster [ 3 ]), consumer products (e.g., Ellison and Fudenberg [12] and Iacobucci and Hopkins [21]), ”
Private Schooling in India: A New Educational Landscape (2008, background): “There is now a substantial literature that suggests that how one performs in life can depend on having access to a literate person at home or, in the parlance of this literature, being a “proximate literate” (Basu and Foster, 1998; Gibson, 2001; Maddox, 2007; Subramanian, 2008).”
The impact of education in rural Ghana: examining household labor allocation and returns on and off the farm (2004, background): “Following the critique of Bound et al. (1995), these instruments also appear to have sufficient predictive power to mitigate the IV-bias associated with weak instruments.”
Acute Multidimensional Poverty: A New Index for Developing Countries (2010, background): “This variable follows the idea of effective literacy of Basu and Foster (1998) that all household members benefit from the abilities of a literate person in the household, regardless of each person’s actual level of education.”
Measuring Pro-Poor Growth in Non-Income Dimensions (2008, unknown): “members (i.e., intra-household externalities) ( Basu and Foster 1998 ).11”
Business Cycles and Macroeconomic Policy in Emerging Market Economies (2003, unknown): “Drawing on his joint work with Guillermo Calvo, Mendoza (2002) lays out several reasons why such rational contagion may be possible.”
Moving from the Household to the Individual: Multidimensional Poverty Analysis (2013, background): “16 Education: The first indicator is based on the idea of proximate literacy, discussed by Basu and Foster, (1998) where the presence of one literate individual provides positive externalities for the entire household.”
On Measuring Household Food Vulnerability: Case Evidence from Northern Mali (2000, background): “By doing so, we account for potential intrahousehold externalities from the one educated member (Basu and Foster, 1998).”