Is Canada an optimal currency area? An inflation targeting perspective

In: The Canadian journal of economics: the journal of the Canadian Economics Association = Revue canadienne d'économique, Volume 49, Issue 2, p. 738-771

Abstract

AbstractWe propose a method, based on the currency union model of Galí and Monacelli, to determine whether a region within an existing currency area belongs in the currency union. The method involves assessing the predictability of regional inflation rates at medium term horizons. We apply the method to the Canadian provinces and find that for all but Alberta there is little evidence of costs in terms of inflation arising from 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 might improve inflation outcomes.