Alternative exchange rate arrangements and effective demand: an important missing analysis in the debate over greater North American monetary integration

Given the wide swings in the exchange value of the Canadian dollar over the past decade, some would like to see a return to a fixed exchange rate system in North America. In reviewing the debate between supporters of pegged versus floating rates, there is little analysis found of the implications that these alternative currency arrangements could have on effective demand along Keynesian lines. Interestingly, not only is this latter issue completely ignored, as among neoclassical economists, but even among Post Keynesian economists, there is little focused analysis of the implications of the choice of exchange rate regime on domestic effective demand. After a brief theoretical analysis of the role that floating versus pegged exchange rates would have on the ability of a domestic economy to amortize negative international shocks, the paper suggests that a floating rate would generate less recessionary pressures domestically than would a pegged exchange rate. Reviewing the economic performance in terms of gross domestic product per capita growth of some 34 countries for the post-Bretton Woods period, from 1973-97, that had experimented with both pegged and non-pegged arrangements, it was found that the latter fared better than the former.