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Responding to fears that moving to a fixed exchange rate monetary regime or currency
union would involve a loss of sovereignty for Canada, Courchene and Harris say that such a
loss would be more apparent than real. They point out that it was during the fixed rate period
of the 1960s that Canada developed its comprehensive social policy infrastructure.
As a final argument, Courchene and Harris note that, in any case, events elsewhere in the
Americas are forcing the issue. There is already a trend toward dollarization both in free trade
partner Mexico and in Argentina, which may serve to constrain the potential for a North
American currency union. Canada needs to be part of any public debate on the evolution of
North American currency arrangements, the authors argue, to ensure that the NAMU option
remains on the table.
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— 30 —
From Fixing to Monetary Union: Options for North American Currency Integration, C.D. Howe Institute
Commentary 127, by Thomas J. Courchene and Richard G. Harris (C.D. Howe Institute, Toronto, June 1999).
28 pp.; $9.00 (prepaid, plus postage & handling and GST — please contact the Institute for details).
ISBN 0-88806-459-6.
Copies are available from: Renouf Publishing Company Limited, 5369 Canotek Road, Ottawa, Ontario K1J
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C.D. Howe Institute
Institut C.D. Howe Communiqué
Embargo : à diffuser le mardi 22 juin 1999 à 10 h
taux de change fixe entièrement soutenu par la banque centrale, et les politiques budgétaires
des gouvernements fédéral et provinciaux, d’un conseil de la devise, d’une « dollarisation » —
consistant en une « dollarisation du marché » (l’adoption par les agents du secteur privé du
dollar américain dans divers secteurs) ou en une « dollarisation politique » (une décision offi-
cielle par les responsables politiques de proclamer le dollar américain comme monnaie légale)
— ou encore d’une union monétaire nord-américaine en bonne et due forme. Les auteurs souti-
ennent que parmi les choix de monnaie unique, c’est celui de l’union monétaire qui serait de
loin préférable à celui de la dollarisation.
Face aux craintes que l’adoption d’un régime monétaire à taux de change fixe ou d’une
union monétaire n’entraîne une perte de souveraineté pour le Canada, les auteurs affirment
que cette perte serait plus apparente que réelle. Ils soulignent également que c’est au cours des
années 60, durant lesquelles le Canada avait adopté un taux de change fixe, que le pays a pu
élaborer son infrastructure détaillée de politiques sociales.
En conclusion, MM. Courchene et Harris font la remarque que de toute manière, les évé-
nements qui se déroulent ailleurs en Amérique imposent une décision. Il se manifeste déjà une
tendance à la dollarisation non seulement dans un pays membre du libre-échange, le Mexique,
mais également en Argentine, et cette situation pourrait restreindre les possibilités d’une un-
ion monétaire nord-américaine. Selon les auteurs, le Canada doit participer à tout débat public
sur l’évolution des dispositions monétaires en Amérique du Nord pour veiller à ce que l’option
d’une union monétaire nord-américaine demeure une possibilité.
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— 30 —
Renseignements : Thomas J. Courchene 613 533-6555;
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From Fixing to Monetary Union: Options for North American Currency Integration, Commentaire no 127 de
l’Institut C.D. Howe, par Thomas J. Courchene et Richard G. Harris, Toronto, Institut C.D. Howe, juin 1999,
28 p., 9,00 $ (les commandes sont payables d’avance, et doivent comprendre les frais d’envoi, ainsi que la TPS
— prière de communiquer avec l’Institut à cet effet). ISBN 0-88806-459-6.
On peut se procurer des exemplaires de cet ouvrage auprès des : Éditions Renouf ltée, 5369, chemin Canotek,
Ottawa ON K1J 9J3 (librairies : 71½, rue Sparks, Ottawa ON, et 12, rue Adelaide Ouest, Toronto ON) ou
encore en s’adressant directement à l’Institut C. D. Howe, 125, rue Adelaide Est, Toronto (Ontario) M5C 1L7.
On peut également consulter le texte intégral de cet ouvrage dans le site Web de l’Institut.
Monetary Policy
by
Thomas J. Courchene
and
Richard G. Harris
The first, and least constraining, policy option In his analysis of alternative exchange rate ar-
rangements for Canada, former Bank of Can-
in the direction of exchange rate stability is the
ada governor John Crow notes that the me-
unilateral one of an exchange rate target. The
chanics of fixing the exchange rate are straight-
target can be informal or formal and can be
forward: “[I]n Canada, all that is needed is a
stated as either a specific parity or a band. One government declaration that its Exchange
variant would adjust the target for underlying Fund Account will intervene in unlimited
differences in inflation rates (crawling targets). amounts to defend a given exchange rate”
The intermediate instruments of monetary (1996, 14). Typically, the exchange rate is al-
control are short-term interest rates, which are lowed to fluctuate within a narrow band (plus
raised or lowered in light of exchange market or minus 1 percent or perhaps 2 percent) of the
outcomes. The central bank might intervene in par value. If this is all that is contemplated, we
the foreign exchange markets, but only to would refer to this as a “pegged exchange
maintain an orderly market, much as the Bank rate.” We agree with Crow that a “pegged re-
of Canada does now. Exchange rate targeting gime invites attack and is demonstrably brittle
cannot eliminate short-term volatility, but it under pressure” (ibid, 13). Indeed, the pres-
sure could well come from within, since, under
has been practiced with some success as a
our definition of a pegged rate, there is no con-
means of reducing misalignment. Its major
certed effort on the part of overall macro policy
advantages are that it does not require the
to defend the peg. While pegged exchange
maintenance of large foreign exchange reserves rates can prove valuable as temporary stop-
and that it allows for temporary departures gaps, this is not what we have in mind in terms
from the targets in the event of unusual exter- of a fixed exchange rate.
nal circumstances.
As in the case of any exchange rate regime
short of a currency union, the central bank’s Fixed Exchange Rates
success hinges on its credibility and on the
Unlike a pegged rate, a full-blown fixed rate
government’s commitment to the exchange
regime would perforce require as an integral
rate target. Specifically, the macro authorities
component the full coordination of fiscal pol-
must occasionally be willing to impose higher
icy, both federal and provincial. As Courchene
interest rates to defend the target, even if this is (1990) notes, what is involved here is a policy
inconsistent with short-term inflation, growth, paradigm shift. Conducting overall macro pol-
or employment goals. This task may be com- icy is quite different under a fixed rate system
plicated by high levels of domestic or foreign than under a floating rate system. Govern-
debt, but the recent experience of industrial ments with booming economies, for example,
countries with strongly integrated and deep temper their booms via their fiscal stance, if
capital markets suggests that it is manageable maintaining the exchange rate fix required
— indeed, it may be easier with fixed rates, them to do so.
since flexible rates can intensify capital flows, It is, of course, still possible that fixed rate
with each movement generating an expecta- regimes can get caught in one-way bets on in-
tion of further movements in the same direc- ternational capital markets. Indeed, Crow’s
tion, prompting more capital flows in search of earlier quote to the effect that a pegged ex-
short-term gains.15 change rate would “invite attack” and is “de-
Fixed exchange rates Yes Yes Yes Fixed, within a narrow Partial, subject to
band gearing policy to
maintaining the
fixed rate
Currency board Yes Yes, but offset by Yes, but under Fixed at one-to-oneb; Less; Bank of
cost of carrying currency board no band Canada is a
foreign currency rules passive actor;
government
deficits can be
financed only by
borrowing
Common Canada-US Maybe; depends Yes Yes, but under None (common Depends on
currency on arrangements the euro currency) arrangements for
arrangement Canadian input
into US Federal
Reserve policy
Market dollarization Yes, but much Yes, but much less Yes As great or greater Reduced
reduced scale of because of reduced than now, with relevance of Bank
use scale of Canadian reduced scale of of Canada policy
dollar use Canadian dollar use for Canadian
households and
businesses
monstrably brittle” was actually in reference strong support for the political goal of
to a fixed rate regime. Yet there are several European Union. Austria and Belgium are
fixed exchange rate success stories — Austria/ close to being in the same camp as the
Germany and Netherlands/Germany, for ex- Netherlands because of their overriding
ample. However, Crow views these as special political commitment to shadowing the
mark. (1996, 17, n12.)
cases:
Minimal; need to select One to three Status quo plus Yes Enhanced access vis-à- Yes
“entry point” years; need to smaller transactions vis flexible rate status
establish costs for US quo
credibility clearings
Could require internal Several years, More integration Yes, but, Larger still Yes, but with
revaluation of prices presumably with US clearings expectation must more US banks
and a new currencyb preceded by systems be that it will not operating in
fixed exchange be reversed Canada
ratesb
Internal revaluation of Probably a National clearings Yes, but only Full Yes, but may be
prices and a new decade, as in the and then full under greater
currency euro process integration into exceptional harmonization
Canada-US clearings circumstances over time with
(presumably along and with large integration of
the lines of the euro costs clearing systems
target scheme)
Parallel currencies and Variable, Progressively Unlikely, once High for those using Will likely be
a depreciating depends on integrated into US private sector the US dollar drawn more into
Canadian dollar; large private sector clearings systems operating on US- US financial
wealth transfers from agents dollar basis policies
Canadian-dollar asset
holders to Canadian-
dollar liability holders
a For all options, the Canadian price level would be tied to the US price level, and Canada would follow the US business cycle more than
under the status quo.
b
This need not be the case. If a currency board were implemented at, say, 75 US cents to the Canadian dollar, this would not require the
issuing of a new currency; the implementation time would also be much reduced.
on the fiscal front and in the context of already question of how one gets to a fixed rate. As the
high and increasing north-south trade integra- Dutch experience indicates, a country cannot
tion could make a fixed Canada-US rate one of go into a permanent fix without first demon-
the most stable and viable such regimes any- strating some commitment to more exchange
where. This does not mean that it could not be rate stability. That is, the monetary authorities
unsettled by unforeseen events; what it should must first demonstrate their willingness to use
mean is that international capital markets monetary policy to deliver on exchange rate
would come to view the Canadian dollar as goals in the form of a target band for the ex-
fully integrated into the US dollar area and, change rate, rather than simply intervene in
therefore, a near-substitute for the US dollar. the foreign exchange rate market.
While we regard a fixed rate regime as a Once this credibility is established, foreign
feasible option for Canada, a number of transi- exchange speculation would become stabiliz-
tion issues deserve mention. First, there is the ing and interest rates between the two coun-
Notes
We wish to acknowledge Ted Carmichael, John Crow, 2 See, however, Courchene (forthcoming), who extends
John Murray, Finn Poschmann, Bill Robson, and Dan- the analysis to incorporate aspects of the Bank of
iel Schwanen for providing valuable comments on an Canada’s conduct of monetary policy.
earlier draft. Since not all of the above agree with the 3 In fixed versus flexible regimes, there is a whole set of
thrust of our analysis, it is more important than usual issues having to do with small, inflation-prone coun-
to attribute what follows solely to the authors. tries that attempt to achieve “credibility” on the infla-
1 In commenting on an earlier draft of this paper, Ted tion front by fixing their currency to that of a large
Carmichael suggested that we distinguish between country with a low inflation rate. This argument does
“market dollarization” and “policy dollarization.” The not have much relevance in the Canadian-US case.
former, as described in the text, relates to the move by 4 The real exchange rate is the nominal exchange rate
private sector agents to adopt the US dollar for a range corrected for differences in the price levels of two
of purposes, while the latter refers to an official deci- economies. From a macroeconomic perspective, the
sion by the policy authorities to proclaim the dollar as real exchange rate is one of the two key relative prices
legal tender. The reference to “market euroization” is in the economy, the other being the real interest rate.
to be interpreted in this light. Fortin (1996) and others argue that, for much of the
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