Regional Perspectives on Dollarization in Canada

In this paper we investigate whether it is preferable for Canadian regions to individually adopt the U.S. dollar or to remain with the current currency arrangement. The empirical analysis focuses on the cross–correlations of various business cycle measures of Canadian regions, of Canada, and of the United States. The business cycle investigation is completed by the analysis of two other important criteria for optimum currency areas, industrial specialization and trade interdependence. Our results highlight a significant heterogeneity across Canadian provinces. In particular, it transpires that it could be economically advantageous for the central provinces of Ontario and Quebec and to a lesser extent British Columbia to adopt the U.S. dollar. In contrast, it is not as clear what the other regions should do, the final answer depending on the path the larger three provinces take.