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Currency Consolidation in the Western Hemisphere - A Candian Perspective on North American Monetary Union

By Thomas J. Courchene, Joint NAEFA/ASSA Session

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Over the decade following the Bank of Canada’s 1988 “conversion” to price stability and the subsequent volatility in the Canada-US exchange rate there have been intermittent calls for greater exchange-rate fixity or greater Canada-US currency integration, e.g., Mundell (1990), Courchene (1990), Harris (1993). However, it was the advent of the Euro in January 1999 that unleashed a veritable flood of interest, papers and conferences on the evolution of Canada-US and North America currency arrangements. As an important aside, the awarding of the 1999 Nobel Prize in Economic Sciences to Canadian Robert A. Mundell provided a further catalyst since Mundell has long been an advocate of some version of Canada-US currency integration.1 Focussing only on the various symposiums or conferences, one would include Western Washington University’s conference Should Canada and the US Adopt a Common Currency (parts of the proceedings of which appeared in the North American Journal of Economics and Finance); special issues of Canadian Public Policy (fall 1999) and Canadian Business Economics (IV, 1999); the Montreal conference Vers une monnaie unique in April of 2000 sponsored indirectly by the Quebec government, the North-South Institute conference To Dollarize or Not To Dollarize (Ottawa, October 2000); and, most recently, the papers are available at the Bank of Canada Website at (

Despite this flurry of activity and interest, it is perhaps not surprising that there is no support for currency integration from Canada’s macro authorities. More surprising perhaps is that the clear majority of academic and private sector economists and financial analysts remain staunch supporters of flexible rates. For some, the reasoning may be that fixed exchange rates are unsustainable, dollarization is undesirable, and a currency union is unattainable, so that flexible rates win by default. For their part, the general public is more inclined to embrace a common currency, although a little probing reveals that they believe that a formal link to the US dollar is more inevitable than it is desirable. With this as backdrop, the purpose of this paper is to articulate a case for a fixed exchange rate between the Canadian and US currencies, the optimal form of which would be a Canada-US or a North American monetary union (henceforth NAMU), largely designed along Euro lines. Of necessity, this will involve repeating aspects of the analyses that Richard Harris and I have published elsewhere (1999, 2000). However, emphasis will be on recent analytical, empirical and policy developments that complement selected features of these earlier analyses...

As a bridge between this introduction and the ensuing analysis, it is instructive to focus on a case for North American currency integration that is not readily amenable to analytical or empirical verification. This is the recognition that the Euro represents a watershed in the annals of economic and monetary history in that it signals the “de-nationalization” of national currency regimes. Relatedly, the advent of the Euro also signals that currency arrangements are emerging as supranational public goods.

The fullest articulation of this potential is probably that by Zanny Minton Beddoes (from the Washington Bureau of The Economist) writing in Foreign Affairs (1999):

When tomorrow’s historians look back at the recent financial crises and subsequent efforts to reform global finance, they will reach two conclusions. First, the grand rhetoric of creating a new global architecture yielded few results. Second, we failed to foresee the most profound consequence of the turmoil: regional currency unions. By 2030 the world will have two major currency zones – one European and the other American. The Euro will be used from Brest to Bucharest, and the dollar from Alaska to Argentina – perhaps even in Asia. These currencies will form the bedrock of next century’s financial stability.

What this means is that the likely currency choice facing Canada will not be between flexible rates and some version of currency integration, but rather between dollarization (i.e. employing the US dollar domestically) and, say, a North American monetary union. Were this the real choice, then Canada’s macro officials, economists and the general public would clearly opt for a monetary union...

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