Forecasting the Effects of a Canada–US Currency Union on Output and Prices: A Counterfactual Analysis

This paper is a counterfactual analysis investigating the consequences of the formation of a currency union for Canada and the USA: whether outputs increase and prices decrease if these countries form a currency union. We use a two‐country cointegrated model to conduct the counterfactual analysis, where the conditional forecasts are generated based on the Gaussian assumption. To deal with structural breaks and model uncertainty, conditional forecasts are generated from different models/estimation windows and the model‐averaging technique is used to combine the forecasts. We also examine the robustness of our results to parameter uncertainty using the wild bootstrap method. The results show that forming the currency union would probably boost the Canadian economy, whereas it would not have significant effects on US output or Canadian and US price levels. Copyright © 2013 John Wiley & Sons, Ltd.