Jun Il Kim and Laura PapiExchange Rate Regimes Analysis • July 7th, 2005
This section examines the long-run options of exchange rate regimes available to the Central American countries. It does not address specific short-run considerations that affect the choice of exchange rate regimes in the near future, but fo- cuses on evaluating the exchange rate arrangement options in the long run—that is, over a period of, say, a decade or longer. The analysis employs a uni- form methodology across countries and offers a re- gional perspective. It takes a long-run view by using an approach derived from the literature on optimum currency areas to evaluate the relative suitability of these countries for different exchange rate arrangements. As a measure of comparison, the suitability of the Central American countries for a common currency (pegged to the U.S. dollar, or full dollarization) is compared to that of the European
