North American Monetary Union. Essay

1058 words - 4 pages

Monetary Union with United StatesIn recent years, there has been an ongoing debate over Canada's exchange rate policy because of its volatility and low value against the U.S. dollar. Canada has two reasons to be still in a floating exchange rate system: Keeping open capital markets going and independence of its monetary policy that led Canada to be successful in stabilizing its economy by keeping inflation and interest rates low. Although this is the case, in their paper, "From Fixing to Monetary Union: Options for North American Currency Integration." Thomas Courchene and Richard Harris argue that flexible exchange rate regime is not useful anymore for growing Canadian economy.According to the authors, Canada's great amount of trade with United States and limitations of its current exchange rate system make it logical to adopt fixed exchange rate regime. This type of regime will fix the value of Canadian with U.S. dollar, which may lead to a North American Monetary Union including Mexico by replacing Canadian with US dollar. An important example to this type of a union is the European Union which seems very successful in recent years.Canada's volatile and weak exchange rates against U.S. dollar since 1970s caused many problems in the economy, such as an unpredictable economy and distortion of the value of prices in market. Courchene and Harris points out that Canadian dollar depreciated from 104 cents in 1974 to its lowest value of 63 cents in 1998 that led a decline in the productivity and competitiveness of Canadian firms relative to the ones in United States. This was the most important reason why the relative standard of living of our citizens fell over time which made many skilled Canadians to migrate to United States. Moreover, unpredictable floating exchange rates put more expenses on Canadian firms that trade with United States regarding to the issue of transaction and accounting costs that are made in two different currencies. When the amount of trade between two countries gets greater with a volatile exchange rate, economic cost of eliminating the risk of exchange rates increases.According to Courchene and Harris, there are important efficiency gains of a monetary union with a fixed exchange rate regime between two countries. It would solve the problem of exchange rate volatility which has negative effects on productivity of Canadian firms and it would eliminate transaction and accounting costs in two currencies. Secondly, there would be a great improvement in financial intermediates in the economy and it would decrease the borrowing costs within the borders. Finally it would increase foreign investment.It is not possible to agree with Harris and Courchene's ideas since it is not clear that a monetary union will be beneficial to Canada. Floating exchange rates can be volatile in time, but this doesn't mean that it is useless. We should remember that there is less evidence that volatile exchange rates affected the trade between two...

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