Is Canada dollarized?

Headnote

* Some critics of Canada's floating exchange rate have suggested that any decision made at the official level either for or against adopting the U.S. dollar as Canada's currency is largely irrelevant. They claim that Canada has already informally dollarized or is well along the path towards dollarization.

* This article examines the evidence of dollarization in Canada, focusing on the use of U.S. dollars for the three main money functions: unit of account, medium of exchange, and store of value.

* While the evidence is somewhat fragmentary, it strongly suggests that Canada has not become dollarized, nor is it becoming dollarized. Canadians overwhelmingly use the Canadian dollar as a unit of account and as a medium of exchange for transactions between Canadians.

* The only area where there is an increasing use of U.S. dollars by Canadians is as a store of value. The Canadian experience is not unique, however. All countries have witnessed a trend towards greater international diversification of portfolios in recent years.

The sharp depreciation of the Canadian dollar over the past decade and the successful launch of the euro in 1999 have sparked a lively debate in Canada about the possible benefits of "dollarization"-generally defined as the widespread use of another country's currency to perform standard money functions. Proposals have ranged from the unilateral adoption of the U.S. dollar to a full-blown North American monetary union. Some observers have gone so far as to suggest that any official decision, either for or against such an initiative, is largely irrelevant since dollarization is already proceeding informally. Indeed, some have suggested that the process of dollarization is not only underway but is far advanced.

The purpose of this article is not to review the advantages or disadvantages of adopting the U.S. dollar as Canada's national currency, but rather to examine the available data and determine the extent to which Canada has already informally dollarized.1 Although the evidence is fragmentary, existing data suggest that informal dollarization is either not occurring or is proceeding at a very slow pace. Indeed, by many measures, Canada is less dollarized now than it was 20 years ago and bears little resemblance to economies that are typically regarded as truly dollarized.

What Do We Mean by Dollarization?