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Canada’s Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms

  • Zahir, Antia
  • Djoudad, Ramdane
  • St-Amant, Pierre

Our contribution in this paper is threefold. First, we survey the empirical literature on consumption smoothing mechanisms of regional economic shocks. Second, building on the work of Asdrubali et al. (1996), we present evidence on the role played by various smoothing mechanisms for specific economic shocks affecting Canadian provinces. Third, we assess whether smoothing mechanisms play a role at the North American level in facilitating the adjustment to shocks affecting Canada and the United States specifically. Our main conclusion is that there appears to be substantially more smoothing of specific provincial shocks across Canadian provinces than there is smoothing of specific shocks affecting the two countries. From this perspective, and in the absence of major structural changes, a Canada–U.S. monetary union would pose several challenges. We also conclude that the “quantity anomaly,” i.e., the empirical finding that consumption tends to be less correlated than output across countries and across U.S. states, is not present in Canadian provincial data.

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Paper provided by Bank of Canada in its series Working Papers with number 99-17.

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Length: 31 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bca:bocawp:99-17
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  18. Tamim Bayoumi & Michael W. Klein, 1995. "A Provincial View of Capital Mobility," NBER Working Papers 5115, National Bureau of Economic Research, Inc.
  19. Tesar, Linda L. & Werner, Ingrid M., 1995. "Home bias and high turnover," Journal of International Money and Finance, Elsevier, vol. 14(4), pages 467-492, August.
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