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Regional currency arrangements in North America


Choosing an exchange-rate regime is largely a matter of choosing the variables that will bear the brunt of adjustment to shocks and disturbances. Floating rates, supported by inflation-targeting regimes of varying degrees of transparency, have dominated currency arrangements in North America, especially after the peso crisis of 1994. Although the member countries have pursued their policy goals without formal coordination, their objectives have been very similar. Meanwhile, de facto integration of the three economies has continued, especially in the realm of cross-border production sharing. The result has been reduction of asymmetries and convergence of business cycles, as well as changes in balance of payments behavior and in the sensitivity of trade to the exchange rate. This paper explores the implications for monetary union.

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  1. For a detailed assessment of the options available to Canada, see Arndt (2003). For reviews of the basic issues, see Bayoumi and Eichengreen (1994), Carr and Floyd (2000), De Grauwe (2005), Eichengreen (1997), Tavlas (1993) and Tower and Willett (1976).

  2. See, Mayes (2005), for example.

  3. See, among others, European Commission (Emerson et al. 1990), Eichengreen (1997) and Krugman (1993).

  4. See, for example, Berg and Borensztein (2000) and Hausmann et al. (1999).

  5. Tavlas (1993) provides a modern version of the traditional OCA argument.

  6. See Frankel (1999) for a general discussion.

  7. See Frankel and Rose (1998) for a possible scenario.

  8. In a recent study, Kunimoto and Sawchuk (2005) suggest that utilization of NAFTA hovers in the neighborhood of fifty percent, meaning that for a significant share of intra-NAFTA trade the costs associated with MFN tariffs are lower than compliance with NAFTA’s rules of origin.

  9. Whether such deepening is politically acceptable is a major question. A broad segment of Canadian public opinion is concerned about the loss of national identity in the face of U.S. cultural dominance. It is further widely believed that Canada would be very much the junior partner in any joint monetary enterprise. These perceptions are strengthened by political indifference in Washington. Though not identical, the situation is similar in Mexico. In both cases, however, these considerations militate more against formal monetary union with the United States than unilateral linkages to the U.S. dollar.

  10. Courchene and Harris (2000) have asserted, in addition, that the allocation of Canadian productive resources may have been distorted as the depreciation prevented resource reallocation out of “older” manufacturing into more modern, high-tech sectors. Such reallocations would have occurred under fixed rates, where world price moderation would have forced weak Canadian firms out of business. The evidence, however, does not support this assertion; and even if it did, it may merely suggest, as McCallum (2000) has noted, that Canada needed a stronger dollar and not that it needs monetary union with the United States.

  11. Grubel (2000) has also been a forceful critic of Canada’s recent exchange-rate regime, but for reasons that have more to do with hysteresis and the role of labor unions.

  12. See Amano and van Norden (1993), Murray (2000), and Murray et al. (2003), for example. Among the evidence brought to bear has been the well-known Bank of Canada exchange-rate equation with mainly relative price variables on the right-hand side. Murray and Powell (2003) also show that the degree of de facto dollarization is too small to offer justification for official dollarization.

  13. As we shall see below, in the presence of cross-border production, the protection provided by the buffer is limited to the content of Canadian value-added in the country’s trade.

  14. See, for example, Chiquiar and Ramos-Francia (2005) and Torres and Vela (2003).

  15. See Arndt and Huemer (2005) for evidence.

  16. See, for example, Knetter (1993), Goldberg and Knetter (1997), and Krugman (1987).

  17. See De Grauwe (2005) for discussion.


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Correspondence to Sven W. Arndt.

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Arndt, S.W. Regional currency arrangements in North America. IEEP 3, 265–280 (2006).

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  • Floating rates
  • Monetary union
  • OCA
  • Production networks

JEL Classifications

  • F41
  • F15
  • F33