Dollarization in Canada: where does the buck stop?

Abstract

The sharp depreciation of the Canadian dollar and the successful launch of the euro have spawned an animated debate in Canada about the potential benefits of formally adopting the US dollar as the national currency. Some observers have suggested that this debate is largely irrelevant, since the Canadian economy is already highly “dollarized.” Canadian businesses and households, they assert, often use the US dollar in preference to their own currency to perform standard money functions. Very little evidence has been advanced, however, to support these claims. This paper examines the available data in an effort to correct this informational deficiency and to draw some tentative conclusions about the extent to which Canada has already been informally dollarized. The evidence suggests that many of the concerns about the imminent dollarization of the Canadian economy are misplaced. The Canadian dollar continues to be used as the principal unit of account, medium of exchange, and store of value within Canada’s borders, and there is no indication that dollarization is likely to take hold in the foreseeable future.