The authors attempt to determine whether the primary advantage of the flexible exchange rate between Canada and the United States—the rapid adjustment of the real exchange rate following an asymmetrical shock—is as evident at the regional as at the national level. They try to determine whether the shocks experienced in different regions of Canada have a significant common component and, above all, whether that component is more important than the component common to a shock to the U.S. economy.

First, the authors identify real and monetary demand and supply shocks which affect the various Canadian regions and the shocks which affect the United States. They impose certain restrictions on the long-term effects that these shocks can have on production levels, prices and real balances. Next, for each region, and for the real supply and demand shocks individually, the authors use estimates from a state-space model to identify a common component to the shocks for the Canadian regions as a whole, a component specific to each individual region, and a component common to the American shocks.

In general, the results show that the specific types of shock experienced in each of the Canadian regions are statistically linked to the common component of all the Canadian shocks and that, in many cases, the common Canadian component is more significant than the specific regional component. In addition, the common Canadian component is always much more important than the component common to the American shocks.