Question

Suppose the Presidents of Mexico and the U.S. agree to form a currency union, with the U.S. dollar adopted as Mexico’s official currency. What policies should the U.S. and Mexican governments undertake to facilitate the success of the new currency union?

Answer 1

If Mexico is using USD as its national currency, it becomes a part of the US economy, albeit unofficially. It links its financial market, capital market, agriculture, industry and services, with that of the US economy. In a currency union member countries are abide to adopt the same currency and follow the same monetary and fiscal policy Hence, both countries would then be setting a monetary policy and fiscal policy in conjugation with each other. These nations would then have to adopt a common foreign policy with other nations. Since the US is already having USD as its national currency, there are challenges for Mexico to adjust. The benefits are of course, a stable economy, a reduction in transaction costs, and an integrated capital and financial market. Fiscal discipline, lower inflation, increased competition are some benefits that the dollarized country Mexico in this case, seeks to achieve. However, these are hopes and aspirations of the dollarized economy which is Mexico in this case, and the impact of dollarization is difficult to link with Mexico's progress