Is Canada an Optimal Currency Area? An Inflation Targeting Perspective
60 Pages Posted: 8 Sep 2013 Last revised: 11 Jun 2015
Date Written: June 10, 2015
We propose a method, based on the currency union model of Gali and Monacelli (2008), to determine whether a region belongs to an existing optimal currency area. The method involves assessing the predictability of regional inflation rates at medium term horizons. We apply the methods to the Canadian provinces and find that for all but Alberta there are no costs in terms of inflation for operating under a common national monetary policy. For Alberta, the evidence suggests that they are not as well served by the inflation targeting framework and that a more flexible policy environment would improve inflation outcomes.
Keywords: optimal currency area, currency union, inflation targeting, optimal monetary, fiscal policies
JEL Classification: E31, E58
Suggested Citation: Suggested Citation