Mexico versus Canada: Stability benefits from making common currency with USD?

Abstract

This paper explores the potential stability benefits from monetary union by examining volatility of PPP-GDP per capita and per hour under various de facto exchange rate regimes. It finds that, for Mexico unlike Canada, volatility is much greater during periods when the nominal dollar exchange rate changes appreciably than when it is quasi-pegged. Since Mexico is not in a position to run a credible peg, it must seek greater stability through dollarization. This finding suggests that the stability benefits of monetary union are greatest for emerging-market countries inside an economically integrating region and non-existent for financially highly advanced countries. © 2005 Elsevier Inc. All rights reserved.