the u. s. dollar, or being de facto dollarized, as some have claimed. recent research conducted at the bank of canada shows clearly that, if anything, canada is now less dollarized than it was two decades ago. we are not drifting towards dollarization. if we go down that road, it will be a deliberate choice. when choosing an exchange rate regime, it is crucial to remember that monetary policy needs to have a nominal anchor. in canada, monetary policy is anchored by our use of an explicit inflation target. if a country chooses not to float its currency, it essentially adopts the monetary policy of the country to which it is tied. this may, or may not, provide an effective nominal anchor. let me briefly explain how the floating exchange rate fits into canada ’ s monetary framework. our monetary policy aims to keep inflation at the 2 per cent midpoint of a 1 to 3 per cent target range. we protect the domestic purchasing power of our currency by keeping inflation low, stable, and predictable. by doing so, we support the conditions necessary for strong, sustainable economic growth. with a floating currency, our exchange rate acts as a mechanism that allows the canadian economy to adjust to important economic changes, or what economists call “ shocks. ” these can include movements in relative world prices, changes in capital flows, or divergent economic conditions across countries. consider commodity prices, for example. as you know very well, canada is an important producer of commodities such as metals, paper, and chemicals. when the world prices of these goods rise, it means that canadian producers receive more income. this rise provides a boost to the canadian economy. when commodity prices fall, it means less income for canadian producers. this has a negative impact on the economy. changes in these sorts of relative prices are a signal to shift real resources out of some sectors and into others. the canadian economy needs to respond to such signals. under a floating - rate regime, movements in the currency help to smooth that process and attenuate the adjustments in output, employment, wages, and prices. without a floating currency, the canadian economy would still need to absorb the effect of changes in relative prices. but the burden would fall initially on output and employment and, eventually, on all wages and prices. this would be a far more difficult and costly process for many. there will always be economic shocks that require adjustments. but because the structures of the u. s. and canadian economies are so different,

david dodge : dollarization and north american integration remarks by mr david dodge, governor of the bank of canada, to the chambre du commerce du quebec, sherbrooke, quebec, 5 october 2002. * * * good morning, ladies and gentlemen. thank you for inviting me to this congress, and for choosing to spend part of your weekend listening to the discussion on this important topic. the question before us sounds straightforward : “ should canada adopt the u. s. dollar? ” but the issues are complicated. i will not pretend that i can cover all the nuances of this topic in my allotted time. so i am running the risk that i may oversimplify matters. i should also say that i want to stick to economic facts and arguments. there is, of course, a big political dimension to the question, but i will leave that to the politicians. i want to confine my arguments today to the field of economics. choosing an exchange rate regime in the years following world war ii, many countries operated under an exchange rate regime that one might call “ fixed until further notice. ” this system, known as the bretton woods system, saw most countries peg the external value of their currencies to some other currency, most often the u. s. dollar. but for a number of reasons, this system of “ fixed until further notice ” exchange rates proved unstable. it has been abandoned by many countries in favour of one of two options - either a floating - rate regime or the use of another currency. most have chosen a floating - rate regime. a few countries have decided to join some kind of monetary union or to use a foreign currency to replace their own. canada was one of the first countries to adopt a floating - rate regime. it did so at the beginning of the 1950s and, generally, this regime has served us well. but with increasing integration of the canadian and u. s. economies, the question now being asked is whether canada might be better off giving up the canadian dollar, either through dollarization or by entering into a monetary union with the united states. what i want to do today is to discuss the benefits and costs of a floating exchange rate versus dollarization at the present time, given the current degree of integration of the u. s. and canadian economies. then i will talk briefly about the implications for our floating exchange rate should the two economies become more integrated. let me just add here that canada is not being inevitably drawn into adopting