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72nd Annual Summer Conference, August 7–10, 2003

“Dollarization” Group Discussion

Summary by Mark Lovewell

Given that dollarization is one of those issues that, for most Canadians, is both arcane and off-putting, it was a pleasant surprise to discover that there were at least fifteen hardy Couch participants willing to delve into its murky details. As all of us were aware, it is a topic that has gained a good deal of notoriety in recent years, thanks to arguments by the likes of well-known economists Richard Harris and Thomas Courchene. While Harris and Courchene would prefer to see a true North American Monetary Union (NAMU) akin to the Eurozone, in practice they recognize (and participants in the discussion group agreed) that Canadian adoption of the US dollar (i.e., dollarization) would be more likely than a brand new amero, given the Americans’ reluctance to give up the greenback.

The group dealt with some of dollarization’s possible benefits and costs. First, there was marked disagreement over whether effective retail prices in Canada would rise or fall after currency union. Some group participants gave examples, based on their personal knowledge of Eurozone trends, to suggest that average prices in Canada might rise. Those participants who were more enamoured with mainstream economic theory suggested that these examples were exceptions, and that effective prices could be expected to drop, as levels of continent-wide competition increased.

The discussion then proceeded to the theoretical arguments on either side of the topic, as introduced by David Dodge in his conference address, when he spoke of the tradeoff between transactions costs and adjustment. To elaborate, proponents contend that, by reducing monetary uncertainty, dollarization would expand both trade flows and GDP in Canada and the US. The counterargument is that these trade-related benefits would come at a cost to national governments, who would no longer be able to use exchange rate changes as a buffer to smooth out the effects of external economic shocks.

Not surprisingly, given that David Dodge represents an institution steadfastly opposed to dollarization, he had been quick in his address to point out the importance of the adjustment argument. The consensus in the group was that Dodge’s emphasis made eminent sense, particularly given the extent to which changes in the loonie’s value since 1998 have allowed the Canadian economy to withstand various global financial shocks with minimal damage. The group was also wary of the argument, voiced by one of the questioners after Dodge’s presentation, that the dollar’s relative fall over the past few years has been a major cause of Canada’s lagging growth in manufacturing productivity. Our economy’s productivity problems, it was agreed, are related to longer-run issues.

The discussion concluded with general consensus that dollarization was not a viable political choice for Canada in near term, though the relative weighting of its potential benefits and costs could change in the future, if at some point the Canadian economy’s reliance on resource exports is significantly reduced. For the foreseeable future, therefore, the loonie’s survival is probably assured, though it would be foolhardy to discount the possibility that there might come a time when this much-maligned emblem of national independence is extinguished in the name of further continental integration.