Sunday, March 04, 2012

Iceland To Adopt The Canadian Dollar As Currency?

The Globe and Mail reports that Iceland is considering to adopt the Canadian dollar as currency.

That would be a somewhat odd choice of currency. Normally when countries unilaterally adopt foreign currencies or pegs their currencies to other currencies, it is currencies of countries which you have extensive trade, like El Salvador and Ecuador with the U.S. dollar, Kosovo, Montenegro and Andorra with the euro or Liechtenstein with the Swiss franc. The reason for this is that this creates the largest possible trading gains. Having a common currency with countries that you have little trade can't produce much gains.

Yet in 2010 Canada received less than 0.5% of Iceland's exports and supplied less than 2% of its imports. The Norwegian krone or the euro would be much more natural choices for Iceland.

The Canadian dollar might still be an improvement from a monetary policy point of view given Iceland's inflationist past (which contrary to the widespread myth has not been successful in solving its problems).


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