Economic integration without policy coordination: The case of Mercosur

This paper analyses the evolution of the South American Common Market, Mercosur. We show how the lack of coordination of macroeconomic policies, especially of the two major participants (Argentina and Brazil), had caused trade strains. Divergent macro-economic policies have had negative effects on bilateral trade due to the risk averseness (resulting from bilateral exchange rate volatilities) of exporters and importers, and due to the protectionist forces they have brought forth.