The merit of a Canada-US monetary union Herbert G. Grubel* David Somerville Chair in Taxation and Finance, The Fraser Institute and Professor of Economics (Emeritus), Simon Fraser University, Fourth Floor, 1770 Burrard St., Vancouver, BC Canada V6J 3G7 Received 20 September 1999; received in revised form 5 April 2000; accepted 10 April 2000 Abstract Institutions of a monetary union are described. The union leaves unchanged countries’ international competitiveness and national real incomes. Static gains arise from lower interest rates in Canada and Mexico because national monetary and exchange rate instability are eliminated. There will be lower costs of foreign exchange transactions. Dynamic gains arise in the form of greater labor market discipline, better signals about developing comparative advantage and higher economic growth. Traditional criteria for the optimality of monetary union are considered irrelevant because they rely on economic characteristics, which are endogenous to the monetary system in operation. © 2000 Elsevier Science Inc. All rights reserved. JEL classification: F0, E5, H1 Keywords: Monetary union; Optimum currency areas 1. Introduction The successful launch of the Euro at the beginning of 1999, the prospect of official dollarization in Argentina and the poor performance of the Canadian economy and dollar in recent years have prompted a growing interest in monetary union in North America. My paper considers first how a common currency would be created, then analyzes the economic benefits and costs of such an arrangement for Canada and the United States. The paper * Tel.: +1-604-980-7922; fax: +1-604-980-6508. E-mail address: GrubelHG@aol.com (H.G. Grubel). North American Journal of Economics and Finance 11 (2000) 19 – 40 1062-9408/00/$ – see front matter © 2000 Elsevier Science Inc. All rights reserved. PII: S1062-9408(00)00039-9