The EMU and the NAMU: What Is the Case for North American Monetary Union?

Abstract

The paper considers the pros and cons for Canada of monetary union between Canada and the United States. The current Canadian monetary arrangements, a flexible exchange rate and an inflation target, are contrasted both with a unilateral adoption by Canada and the US dollar and with a full, formally symmetric monetary union. Macroeconomic transactions costs savings argue in favour of either form of monetary union. Seigniorage considerations argue against unilateral adoption of the US 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 stabilization 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 US dollar. Because of the absence of any democratic political institutions spanning both Canada and the United States, the political arguments against any form of monetary union are overwhelming. Without a 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.