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Real and Monetary Shocks to the Canadian Dollar: Do Canada and the U.S Form an Optimal Currency Area?

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Author Info
Jack L. Carr
John E. Floyd
Abstract

There 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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Publisher Info
Paper provided by University of Toronto, Department of Economics in its series Working Papers with number floyd-01-02.

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Length: 32 pages
Date of creation: 07 Dec 2001
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Handle: RePEc:tor:tecipa:floyd-01-02

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Related research
Keywords: 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

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References listed on IDEAS
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  1. Crow, J., 1999. "Any Sense in a Canadian Dollar?," Papers 99-1(a), California Davis - Institute of Governmental Affairs.
  2. Michael B. Devereux, 1997. "Real Exchange Rates and Macroeconomics: Evidence and Theory," Canadian Journal of Economics, Canadian Economics Association, vol. 30(4), pages 773-808, November.
  3. Flood, Robert P. & Rose, Andrew K., 1995. "Fixing exchange rates A virtual quest for fundamentals," Journal of Monetary Economics, Elsevier, vol. 36(1), pages 3-37, August. [Downloadable!] (restricted)
    Other versions:
  4. R. Dornbusch, 1975. "The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy," Working papers 165, Massachusetts Institute of Technology (MIT), Department of Economics.
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  5. Stockman, Alan C., 1999. "Choosing an exchange-rate system," Journal of Banking & Finance, Elsevier, vol. 23(10), pages 1483-1498, October. [Downloadable!] (restricted)
  6. Laidler, David, 1999. "The Exchange Rate Regime and Canada's Monetary Order," Working Papers 99-7, Bank of Canada. [Downloadable!]
  7. Baxter, M. & Stockman, A.C., 1988. "Business Cycles And The Exchange Rate System: Some International Evidence," RCER Working Papers 140, University of Rochester - Center for Economic Research (RCER).
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  8. Bayoumi, T. & Eichengreen, B., 1994. "One Money or Many? Analysing the Prospects for Monetary Unification in Various Parts of the World," Princeton Studies in International Economics 76, International Economics Section, Departement of Economics Princeton University,.
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