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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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Listed:
  • 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.

Suggested Citation

  • Jack L. Carr & John E. Floyd, 2001. "Real and Monetary Shocks to the Canadian Dollar: Do Canada and the U.S Form an Optimal Currency Area?," Working Papers floyd-01-02, University of Toronto, Department of Economics.
    • Handle: RePEc:tor:tecipa:floyd-01-02
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    References listed on IDEAS

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    Cited by:

    1. Jean Louis, Rosmy & Brown, Ryan & Balli, Faruk, 2011. "On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?," Economic Modelling, Elsevier, vol. 28(6), pages 2701-2718.

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    More about this item

    Keywords

    open economy macroeconomics; international monetary arrangements and institutions; financial aspects of economic integration;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F1 - International Economics - - Trade

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