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Iceland could adopt the Canadian loonie

David Brancaccio Apr 16, 2012

David Brancaccio: Back now to our fun-with-exchange-rates theme this morning. The word “thrilled” would be stretching it, but Canadians are said to be flattered about a proposal for Iceland to switch to the Canadian currency. Adopting the Loonie is just an idea at this stage, nothing imminent.

But it offers a teachable moment about the world economy and to help us is Christopher Ragan an econ professor at McGill in Montreal. Dr. Ragan, good morning.

Christopher Ragan: Good morning.

Brancaccio: What do you think — any logic to this idea of Iceland adopting Canada’s currency?

Ragan: The logic of one country adopting another country’s currency, or fixing their exchange rate to it, makes more sense if the two countries are subject to the same sorts of external economic shocks. And it’s not clear to me that Iceland has an economy that is very similar to Canada’s in that respect, so I really wonder whether this would be a good idea for Iceland. I think it would be approximately irrelevant for Canada.

Brancaccio: Is that right? That’s the answer to the question if there’s anything in it whatsoever to Canada — is not much?

Ragan: I think from Canada’s point of view, it’s approximately irrelevant. From Iceland’s perspective, it’s a serious decision to make. But in my view, the volatility of their exchange rate is an indication that their flexible exchange rate is actually working. I mean, economists say that shocks happen, and when you have a flexible exchange rate, the exchange rate adjusts and it cushions the economy from some of the effects of those shocks. So if you adopt somebody else’s currency, you give up that ability.

Brancaccio: And we should say that none of this is a foregone conclusion. This is just an idea being discussed, bandied about at this stage.

Ragan: Right. Well, and I think it’s common in many countries when you’re faced with exchange rate volatility to think about avoiding that volatility by pegging the currency. The problem is, there are real things out there in the world creating that volatility, and if you simply lock in the exchange rate, those outside shocks don’t go away. And so the volatility shows up elsewhere. I would much rather have an exchange rate bouncing around by 10 or 15 percent than output unemployment bouncing around by large amounts.

Brancaccio: Well Prof. Christopher Ragan, McGill University in Montreal. Thank you very much for this.

Ragan: My pleasure.

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