Monetary Aspects of Alberta Separation

To: Alberta referendum voters 

From: Rhys Mendes and John Murray

Date: September 15, 2026 

Re: Monetary Aspects of Alberta Separation

This is the second in a series the C.D. Howe Institute is presenting to better inform the public about the policy issues and complexities of the potential separation of Alberta, and its consequences on Albertans, businesses and the rest of Canada. Today: Which dollar to choose? The 1995 Quebec referendum offers a useful lesson for any province contemplating separation: Political uncertainty quickly becomes monetary and financial uncertainty.

In the run-up to that vote, markets fretted about the monetary arrangements that would accompany separation. Former Quebec premier Jacques Parizeau even had a secret “Plan O” to stabilize the Quebec government bond market in the event of a “Yes” vote. The same concerns would confront Alberta today.

A recently published plan by an Alberta independence group proposes transitional use of the Canadian dollar, deferring decisions on permanent monetary arrangements. International experience suggests that it could be difficult to implement such a staged transition in an orderly manner. When Czechoslovakia underwent its so-called “Velvet Divorce” in 1993, the two successor states initially agreed to a transitional monetary union. But the arrangement was quickly undone by a violent market reaction and capital flight.

Good intentions ended in tears. With today’s digitalized financial system, similar forces could operate even more quickly. That makes the choice of monetary arrangements not merely a question of long-run economic design, but a critical part of managing the transition itself.

For an independent Alberta, that choice would essentially come down to three options: Continuing to use the Canadian dollar, creating a new Alberta dollar, or adopting the US dollar. All have advantages and disadvantages. But, from a monetary and financial stability perspective, none is likely to be as attractive as the status quo.

Option 1: Use the Canadian dollar

Continuing to use the Canadian dollar could ease the transition. But using the currency unilaterally would involve several costs.

Alberta would lose any influence over Canadian monetary policy. The Bank of Canada currently targets inflation in Canada as a whole and therefore automatically takes account of economic conditions in all provinces. If Alberta left Canada, Canadian monetary policy would no longer account for conditions in Alberta.

Without Alberta, the Canadian economy would cease to be a net exporter of oil, making Canadian monetary policy less responsive to shifts in oil prices than it is today.

For a net exporter of oil, like Canada, persistent shifts in the level of oil prices have an important effect on the terms of trade. For example, higher oil prices increase revenue from oil exports, raising incomes and spending in Canada. This can put persistent upward pressure on inflation and can therefore warrant a monetary policy response from the Bank of Canada. Without Alberta, Canada would no longer face the same effects from shifts in oil prices and so its monetary policy would become less responsive to oil prices.

This could mean policy set for the rest of Canada may often be inappropriate for Alberta, producing greater volatility in GDP, employment and inflation in Alberta than under the status quo.

In addition, Alberta would not have its own lender of last resort, with the ability to supply unlimited Canadian-dollar liquidity during a bank run, debt crisis or other financial instability event. Alberta could create its own liquidity fund, but unlike the Bank of Canada it could not create Canadian dollars. The fund would have to be accumulated in advance or borrowed.

Alberta’s exposure to volatile oil prices heightens liquidity risks. An oil-price collapse could reduce foreign-currency inflows and government revenues, weaken borrowers, and trigger deposit or capital outflows. Banks’ demand for Canadian-dollar liquidity could therefore rise precisely as the government’s own ability to borrow Canadian dollars was deteriorating.

A formal monetary union could address some of these problems, but it is not obvious why it would be in Canada’s interest to enter into such an arrangement. Even if established, a monetary union without a fiscal union would bring its own fragilities. The euro-area crisis illustrated the problems posed by sharing a currency when countries face asymmetric shocks without common control over fiscal policy. The crisis might have destroyed the euro area without Mario Draghi’s 11^th hour pledge that the European Central Bank would do “whatever it takes.” There is no clear reason why Canada would provide an equivalent guarantee to an independent Alberta.

Option 2: Create an Alberta dollar

The obvious alternative to using the Canadian dollar would be for an independent Alberta to create its own currency. If markets and the public accepted a new Alberta dollar, it could allow Alberta to collect seigniorage, provide emergency liquidity, have a floating exchange rate, and pursue an independent monetary policy.

Importantly, a floating exchange rate would help lessen the impact of global oil price shocks on Alberta’s economy. However, in a highly open economy (i.e. where exports and imports make up a large share of GDP), there tends to be greater pass-through of any nominal depreciation into the domestic price level, causing more of the real depreciation to be undone. Alberta’s economy is more open than Canada's, so exchange-rate flexibility could be less useful to Alberta.

Those macroeconomic effects would have to be weighed against microeconomic disadvantages. As Robert Mundell emphasized, separate currencies bring higher transaction costs and greater exchange-rate volatility than a fixed-rate or common currency arrangement.

Nearly 40 percent of Alberta’s trade is with the rest of Canada. A separate floating currency would introduce both exchange-rate risk and currency-conversion costs into a trading relationship that currently faces neither.

The transition to a new currency would also raise thorny questions about redenomination of existing assets and liabilities. Redenominating Alberta’s pre-existing Canadian-dollar sovereign debt, including any share of the federal debt that it assumed, would likely constitute an effective default.

To avoid this, Alberta would have to begin independence carrying substantial foreign-currency debt.

Foreign-currency debt is worrisome because it can turn an ordinary depreciation or recession into a debt crisis.

For Alberta, oil complicates the picture. Foreign-currency oil revenues provide a natural hedge against foreign-currency liabilities. But oil prices could also trigger a vicious circle: An oil-price decline as in 2014 would lead to lower foreign-currency oil revenues and a depreciation of the Alberta dollar; depreciation would increase the domestic-currency burden of Canadian-dollar debt; the heavier debt burden would raise default risk; rising default risk would produce further depreciation; and so on.

Option 3: Adopt the US dollar

The third option would be to adopt the US dollar – to “dollarize” the Alberta economy. Alberta's trade with the United States is even greater than its trade with the rest of Canada, so adopting the US dollar would potentially bring some efficiency gains.

However, in important respects, it would also be the worst of both worlds. Dollarizing would require a costly redenomination associated with moving away from the Canadian dollar, while still leaving Alberta without an independent monetary policy or lender of last resort.

In dollarized economies like Panama and Ecuador, the lack of access to emergency liquidity facilities causes banks to compensate in inefficient ways. They often hold larger liquidity buffers or use industry-funded facilities, but these cannot provide an unlimited currency backstop.

For Alberta, the absence of an assured US-dollar liquidity backstop could become especially important during a severe oil-price downturn. As noted earlier, such a shock could simultaneously reduce US-dollar oil receipts, and weaken government finances, borrower balance sheets and investor confidence.

Conclusion

None of these options is ideal. Each would require Alberta to surrender something it currently obtains from the Canadian monetary union. Separation would therefore involve choosing which monetary advantages of the status quo Alberta was prepared to give up.

Moreover, that choice might not be entirely Alberta’s to make. Whatever monetary regime an independent Alberta government chose, households and businesses could choose to hold and transact in Canadian dollars, US dollars or potentially in digital currencies and stablecoins. A nascent monetary regime is more likely to be susceptible to this type of currency substitution than an established one.

If currency substitution were to become widespread, it could undermine the monetary arrangements chosen by the government. The monetary regime that emerged after separation could therefore be shaped as much by market forces as by government policy.

Rhys Mendes and John Murray are both former deputy governors of the Bank of Canada and senior fellows at the C.D. Howe Institute.

To send a comment or leave feedback, email us at blog@cdhowe.org. 

The views expressed here are those of the authors. The C.D. Howe Institute does not take corporate positions on policy matters.