Working Paper: CEPR ID: DP2181
Authors: Willem H. Buiter
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.
Keywords: North American Monetary Union; Optimal Currency Area; Seigniorage; Lender of Last Resort; Central Bank Accountability
JEL Codes: E42; E44; E52; E58; F33; F36; F41; G15; H77
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary union (F36) | microeconomic transaction costs (D23) |
| Seigniorage considerations (E49) | unilateral dollarization (F31) |
| Seigniorage considerations (E49) | formally symmetric monetary union (F36) |
| Loss of lender of last resort capabilities (F65) | unilateral dollarization (F31) |
| Macroeconomic stabilization aspects of fixed exchange rate (E63) | monetary union (F36) |
| Market-determined exchange rate volatility (F31) | effectiveness as shock absorber (J28) |