Thursday, May 10, 2012

How the Latin Triangle Swallowed the Euro

Back in 1996, Rudiger Dornbusch wrote a paper about the political economy of exchange rates in Latin America. He called it “The Latin Triangle”. It describes a cycle in which governments become trapped in inappropriate fixed-exchange rates that inevitably end unhappily. Latin America has put that particular form of economic instability behind it, but a new version of the Latin triangle seems to be playing itself out in Europe today, both in the weaker members of the euro area (the so-called PIIGS) and in some of the newer member states that chose fixed rates (the BELLs—Bulgaria, Estonia, Latvia and Lithuania). This post explores the implications of the Latin American experience for Europe today. >>>Read More

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