LESSONS FROM THE MONETARY EXPERIENCE OF PANAMA: AD OLLAR ECONOMY WITH FINANCIAL INTEGRATION

Abstract

Panama’s monetary system has the following characteristics: (1) The U. S. dollar is the medium of exchange, while the balboa, the national currency, is a unit of account and exists only as silver coins; (2) capital markets are free, with almost no government intervention or restrictions on banking transactions, financial flows, or interest rates; (3) many international banks operate in Panama; and (4) there is no central bank. As such, the economy of Panama can be considered a ‘‘control case’’ in a simulation experiment, where the monetary and macroeconomic equilibrium process can be studied without financial sector distortions, government intervention, or central bank policies. Hence, Panama’s experience reveals the ‘‘experimental market answer’’ to many macroeconomic issues, and the central importance of financial integration.

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