- Editors’ Summary
The four papers in this issue of Economía cover both macro-and microeconomic topics of extreme relevance to the policy debate in Latin America. In “A Comparison of Product Price Targeting and Other Monetary Anchor Options for Commodity Exporters in Latin America,” Jeffrey Frankel discusses the advantages and drawbacks of seven alternative nominal variables that could become anchors or targets of monetary policy. Also with respect to monetary policy, Marc Hofstetter notes in “Inflation Targeting in Latin America: Toward a Monetary Union?” that five of the main economies in Latin America have moved toward inflationtargeting regimes (Brazil, Chile, Mexico, Colombia, and Peru) and asks whether, under those circumstances, it might not be better for these economies to adopt a common currency. Switching to the microeconomic perspective, in “Is Violence against Union Members in Colombia Systematic and Targeted?” Daniel Mejía and María José Uribe investigate the claim that union leaders are targets of political violence in Colombia, finding no empirical support for this commonly held belief. Finally, “The Dynamics of Income Inequality in Mexico since NAFTA,” by Gerardo Esquivel, analyzes the reduction in inequality in Mexico since 1994, showing that labor income, social programs, and remittances played a major role in that process and arguing that the observed pattern resulted from the interaction of market forces and state interventions.
In the first paper, Jeffrey Frankel considers the relative strengths of alternative anchors or targets of monetary policy, focusing on Latin America and the Caribbean. Economies in this region tend to be price takers on world markets, to export commodities subject to volatile terms of trade, and to experience procyclical international finance. Of the seven anchors and targets considered, three are exchange rate pegs (dollar, euro, and special drawing rights), one is orthodox inflation targeting, and three represent new proposals for inflation targeting, with particular emphasis on the price of export commodities: PEP (peg the export price), PEPI (peg [End Page vii] an export price index), and PPT (product price targeting). The paper presents counterfactual exercises to analyze the performance of these different regimes in response to various types of shocks. Frankel argues that the advantage of the new proposals in relation to traditional CPI inflation targeting is that they can serve as nominal anchors and, at the same time, accommodate shocks to the terms of trade. CPI-based inflation targeting typically leads to tighter monetary policy as a response, for example, to increases in the world price of imported oil, generating currency appreciation. The author argues that a product price target would perform better in stabilizing the real domestic prices of tradable goods, since it would lead to appreciation in response to increases in the world prices of commodity exports, not in response to increases in the prices of imports. The recently increased volatility of commodity prices resurrected the debate on the desirability of currency regimes that are able to accommodate terms of trade shocks, highlighting the timeliness of the discussion raised in Frankel’s paper.
In the following paper, Marc Hofstetter keeps the focus on monetary policy but turns his attention to the potential costs and benefits of a monetary union in Latin America and its weaknesses and strengths relative to those of dollarization. Brazil, Chile, Colombia, Mexico, and Peru have adopted inflation targeting since the 1990s, and inflation has been kept at one digit in all of them since 2000. Hoffstetter concentrates on these five countries, noting that converging monetary strategies lead naturally to the question of whether welfare gains might result from adopting a common currency. In trying to answer this question, the paper presents a simple policy model, along with results from the vast literature on monetary unions, to obtain estimates of the benefits and costs associated with a monetary union and with unilateral dollarization. The results suggest that the five countries considered would indeed benefit from a monetary union. With the exception of Brazil, they would also benefit from dollarization, but only in Mexico would the benefits from dollarization be clearly higher than those from a monetary union. Dollarization has obvious advantages only in countries that have strong trade links with...