Stabilization and nonfederal behaviour in an open federal State: An econometric study of the fixed exchange rate, Canadian Case

During their attempts at stabilization, the central authorities in a federal system often face the prospect of lack of co-operation by junior levels of government. In the context of a macroeconometric model of the Canadian economy, this paper presents a framework for assessing the importance of junior government behavior to the outcome of centrally directed stabilization policies. The results do not confirm the view that the success of these policies requires nonfederal government co-operation. Relatively extreme assumptions about discretionary nonco-operation by junior jurisdictions are needed to conclude stabilization by the central authorities would not work at all simply because of this lack of co-operation.

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