Central America Central Bank: Proposal of Monetary Integration of Central America

By Castro, Juan | Forum on Public Policy: A Journal of the Oxford Round Table, Summer 2008 | Go to article overview

Central America Central Bank: Proposal of Monetary Integration of Central America


Castro, Juan, Forum on Public Policy: A Journal of the Oxford Round Table


Introduction: Forces of Integration

Arguably no period of history has exemplified such a high level of economic integration between countries as the current period. This trend toward world integration is the result of nations desiring free trade, particularly within their neighboring region. Regional integration seems to mutually provide economic benefits to all countries involved in the agreement.

As the number of nations involved in an agreement grows, difficulties are often encountered in reconciling different worldviews and perspectives. In a short-range trade relationship, however, many of those problems are nonexistent. Generally, people from the same region will have similar cultures and ideologies regarding integration and fewer countries mean greater ease of solving the disagreements and difficulties that do occur. For this reason, regional integration is understandably the first level of international relations that nation's will seek to enter. It is the natural progression of international trade. (1)

Central America has for a long time wanted to integrate itself in a single country. Immediately after independence, in 1821, there were several statesmen such as Francisco Morazan that wanted to establish the United States of Central America, countries arranged as confederation in the style of the United States of America or the United States of Mexico.

Integration is a very interesting objective, because it proposes that when countries are united, the unit social, political, and economic that this generates it provides to his citizens in better standard of life. This was the vision of the European Community to create in 1992 the European Union, based on the Maastricht Agreement, and its consequent creation of the European Central bank. In March, 2002, euro became the official currency of 12 countries that include what is now called the European zone of euro.

Benefits and Costs of the CACB

The Central America Central Bank (CACB) would exist primarily as a unifying factor for the nations of Central America, including Honduras, Nicaragua, Costa Rica, Panama, Guatemala, and El Salvador. While this is an admittedly general statement, this lies at the heart of the purpose of creating such an institution. For Central America to be able to actively participate in trade, fiscal regulation will be beneficial. A central bank will allow the nations to finance any trade activity made by the nations as region that an individual country would not be able to handle on its own.

The purpose of any central bank is to be "responsible for overseeing the monetary system for a nation (or group of nations)." (2) Depending on the type of central bank, many responsibilities fall to this institution. It works to stabilize currency, prevent unemployment, and generally regulate monetary policy. According to Investopedia, central banks "generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort." (3) A regional central bank, such as this proposed CACB, would not necessarily serve all of these functions. Having an international bank such as this does not mean that national central banks cease to exist. Therefore, depending on the version of banking chosen for the CACB, it would not have to automatically fulfill the role of overseer of commercial banks within the Central American countries or be the official bank of each government. Regardless of the differing options in banking style (detailed in the next section), the CACB will fill the role of uniting and backing the financial decisions of the nations of Central America.

Versions of the Central Bank

While the establishment of a central bank for Central America is important, there is not necessarily one way to go about it. Different versions of banking exist, each serving a somewhat different purpose. …

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