U.S., Mexico, Canada Consider Currency Linkage

By Nazar, Sylvia | THE JOURNAL RECORD, December 26, 1991 | Go to article overview

U.S., Mexico, Canada Consider Currency Linkage


Nazar, Sylvia, THE JOURNAL RECORD


Should the United States, Mexico and Canada follow Europe's lead and move toward a North American currency area as well as a freer regional trade zone?

The question is not on any official agendas. But the Federal Reserve Bank of Dallas and the Mexican central bank are quietly studying coordination to dampen swings in the peso-dollar rate. Some hard-pressed Canadian exporters are urging Toronto to peg the Canadian dollar to the U.S. dollar.

And the former Federal Reserve chairman, Paul A. Volcker, recently predicted that "in five years, you will find a fixed exchange rate among the peso, the U.S. dollar and the Canadian dollar."

Harvey Rosenblum, research director of the Federal Reserve Bank of Dallas, said: "You don't have to go all the way to a single currency to get some of the advantages. A tacit agreement to keep rates within a narrow band, absolutely fixed rates, or a single currency are all degrees of the same thing."

Since its economy is by far the biggest of the three, the United States would probably feel fewer effects of currency linkage than Mexico or Canada.

With steadier exchange rates, importers and exporters would face fewer problems, less uncertainty and lower business costs. Rosenblum compares bumpy exchange rates to pothole-strewn highways: "You can haul the goods, but it's a lot tougher."

Predictable exchange rates could also increase investor confidence, helping to broaden financial markets and bring in more investment _ particularly in Mexico where the perennial worry remains the risk of a sudden flight from the peso.

"Economists always say that you can hedge," said Richard Cooper, an economist at the Kennedy School. "But you can't hedge an investment with a 10-year life."

Stable exchange rates could also help defuse a potential backlash against freer trade from business and unions by minimizing large swings in currencies.

Finally, linking currencies "puts pressure on high-inflation countries to mend their ways," said Robert Gay, an economist at Morgan Stanley. In Mexico, inflation has been running at 20 percent, multiples of the 3.5 percent in the United States.

The peso was, in fact, linked to the U.S. dollar during the 1950s and 60s _ "a remarkable period of growth and stability and open capital markets in Mexico," as Volcker put it.

Few economists would deny that these benefits may accrue. But many believe that the economic case for giving up floating rates and edging toward a North American currency area is much weaker than in Europe _ quite apart from the fact that the merest whisper of economic integration raises hackles in Canada and Mexico. …

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