ABSTRACT
The question addressed by Chapters 1 and 2 is to verify the costs and benefits for Mexico of a possible passage to coordination of monetary policies among the countries forming NAFTA, ranging from a fixed exchange rate agreement to a currency board, to a monetary union. Both papers agree that – due to the large inflation differential with the US – the floating exchange rate with the dollar is still the best option for Mexico. Surrendering monetary sovereignty would be too costly, because high inflation and the high propensity to import inputs put the Mexican economy at the risk of trade account imbalances. The external constraint, coupled with low monetary policy credibility and the weak structure of the banking system which the recent crisis has dramatically confirmed, would expose the currency to speculative attacks.
