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The EMU and the NAMU: What is the Case for North American Monetary Union?

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  • Buiter, Willem H

Abstract

The paper considers the pros and cons for Canada of monetary union between Canada and the U.S. The current Canadian monetary arrangements, a flexible exchange rate and an inflation target, are contrasted both with a unilateral adoption by Canada of the U.S. dollar and with a full, formally symmetric monetary union. Microeconomic transactions costs savings argue in favour of either form of monetary union. Seigniorage considerations argue against unilateral adoption of the U.S. dollar, but in favour of a formally symmetric monetary union. Loss of the lender of last resort is a powerful argument against unilateral monetary union. The optimal currency area arguments (which concern the macroeconomic stabilisation aspects of a permanently fixed exchange rate) probably favour either form of monetary union. The shock absorber properties of a flexible exchange rate are dominated by the extraneous instability and excess volatility inherent in a market-determined exchange rate when financial markets are highly integrated. On balance, the economic arguments favour a full, formally symmetric monetary union but not the unilateral adoption of the U.S. dollar. Because of the absence of any democratic political institutions spanning both Canada and the U.S., the political arguments against any form of monetary union are overwhelming. Without North American Political Union, the transfer of national sovereignty to a supranational central bank would lack political legitimacy. The lack of institutions for ensuring the political accountability of a North American Central Bank means that NAMU is unlikely to happen and that, if it were to happen, it is unlikely to survive.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2181.

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Date of creation: Jun 1999
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Handle: RePEc:cpr:ceprdp:2181

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Keywords: Central Bank Accountability; Lender Of Last Resort; North American monetary union; Optimal Currency Area; Seigniorage;

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  1. Laidler, David, 1999. "The Exchange Rate Regime and Canada's Monetary Order," Working Papers 99-7, Bank of Canada.
  2. Barry Eichengreen., 1996. "On the Links Between Monetary and Political Integration," Center for International and Development Economics Research (CIDER) Working Papers C96-077, University of California at Berkeley.
  3. Poole, William, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, MIT Press, vol. 84(2), pages 197-216, May.
  4. Gordon G. Thiessen, 1998. "The Canadian Experience with Targets for Inflation Control," Canadian Public Policy, University of Toronto Press, vol. 24(4), pages 415-428, December.
  5. Charles Engel & John H. Rogers, 1995. "How wide is the border?," International Finance Discussion Papers 498, Board of Governors of the Federal Reserve System (U.S.).
  6. Willem H. Buiter & Douglas D. Purvis, 1980. "Oil, Disinflation, and Export Competitiveness: A Model of the "Dutch Disease"," NBER Working Papers 0592, National Bureau of Economic Research, Inc.
  7. W.H. Buiter, 1999. "Alice in Euroland," CEP Discussion Papers dp0423, Centre for Economic Performance, LSE.
  8. Buiter, Willem H, 1997. "The Economic Case for Monetary Union in the European Union," Review of International Economics, Wiley Blackwell, vol. 5(4), pages 10-35, Supplemen.
  9. Dowd, Kevin & Greenaway, David, 1993. "Currency Competition, Network Externalities and Switching Costs: Towards an Alternative View of Optimum Currency Areas," Economic Journal, Royal Economic Society, vol. 103(420), pages 1180-89, September.
  10. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
  11. Masson, Paul R & Taylor, Mark P, 1992. "Common Currency Areas and Currency Unions: An Analysis of the Issues," CEPR Discussion Papers 617, C.E.P.R. Discussion Papers.
  12. Buiter, Willem H & Panigirtzoglou, Nikolaos, 1999. "Liquidity Traps: How to Avoid Them and How to Escape Them," CEPR Discussion Papers 2203, C.E.P.R. Discussion Papers.
  13. Bayoumi, Tamim & Masson, Paul R, 1994. "Fiscal Flows in the United States and Canada: Lessons for Monetary Union in Europe," CEPR Discussion Papers 1057, C.E.P.R. Discussion Papers.
  14. Fidrmuc, J. & Horváth, J., 1998. "Stability of Monetary Unions: Lessons from the Break-Up of Czechoslovakia," Discussion Paper 1998-74, Tilburg University, Center for Economic Research.
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