Financial and Economic Convergence in Pacific Alliance Countries

Abstract

This chapter aims to analyze whether member countries of the Pacific Alliance agreement showed economic and financial convergence during the 2010–2016 period. The sample consists of four Latin American countries that are members of the Alianza del Pacífico (Pacific Alliance): Mexico, Chile, Colombia, and Peru. We use an economic convergence index (ECI) to classify the degree of the countries’ convergence regarding a given monetary area, considering the size of their economy, and compute three criteria: (1) nominal variables (used to define the Maastricht criteria), which are inflation, long-term interest rates, public debt, fiscal deficit as percentages of gross domestic product (GDP), and exchange rate volatility; (2) real and cyclical variables such as real GDP growth, gap between real GDP and potential GDP, unemployment, current account balance as a percentage of GDP, and short-term interest rates; and (3) a conditional combination that unequally weights nominal and real variables. We also use correlation analysis to compare coefficients. The results can be analyzed in the medium term in terms of descriptive statistics of their real and nominal variables, convergence indexes, and correlation analysis. The results show that the countries of the Pacific Alliance under study are converging in terms of nominal variables such as interest rate, exchange rate, fiscal deficits, and government debt. Also it can be observed that convergence occurs in real and weighted variables, although to a lesser magnitude. In relation to real variables related to GDP growth and foreign trade, these variables adjust less quickly than nominal ones.

Citation

Rodríguez, M.d.P., Cortez, K. and Méndez, A.B. (2019), "Financial and Economic Convergence in Pacific Alliance Countries", Blanco-Jimenez, M. and Álvarez, J.C. (Ed.) Regional Integration in Latin America, Emerald Publishing Limited, Leeds, pp. 45-60. https://doi.org/10.1108/978-1-78973-159-020191004