Real and Monetary Shocks to the Canadian Dollar: Do Canada and the U.S Form an Optimal Currency Area?
AbstractThere is widespread agreement that during the floating exchange rate period from 1970 to the present Canada's nominal and real exchange rates with respect to the United States have shown considerable volatility. It has been suggested that the volatility of the real exchange rate would be substantially reduced if the nominal exchange rate with the U.S.~dollar were fixed, either through a permanent fixed exchange rate mechanism or the adoption of a common North American Currency. In all discussions of the fixed verses floating exchange rate question, it is important to understand why real exchange rates are volatile. The sources of real exchange rate volatility are the focus of our paper. Our findings are that substantial real shocks have occurred and were an important determinant of the real exchange rate. Since our results indicate that the sources of exchange rate volatility are real, not monetary, they are unfavorable to the adoption by Canada of a common currency with the United States.
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Bibliographic InfoPaper provided by University of Toronto, Department of Economics in its series Working Papers with number floyd-01-02.
Length: 32 pages
Date of creation: 07 Dec 2001
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open economy macroeconomics; international monetary arrangements and institutions; financial aspects of economic integration;
Find related papers by JEL classification:
- F3 - International Economics - - International Finance
- E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
- F1 - International Economics - - Trade
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-04-02 (All new papers)
- NEP-IFN-2001-04-02 (International Finance)
- NEP-MON-2001-04-02 (Monetary Economics)
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