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The Exchange Rate and Canadian Inflation Targeting

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    Abstract

    An essential element of the Bank of Canada's inflation-targeting framework is a floating exchange rate that is free to adjust in response to shocks that affect the Canadian and world economies. This floating rate plays an important role in the transmission mechanism for monetary policy. A practical question is how the Bank of Canada incorporates currency movements into the monetary policy decision-making process. Only after determining the cause and persistence of exchange rate change, and its likely net effect on aggregate demand, can the Bank decide on the appropriate policy response to keep inflation low, stable, and predictable. Ragan reviews the need to target inflation and the transmission mechanism for monetary policy, including the role of the exchange rate, before describing two types of exchange rate movements and their implications for monetary policy.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/06/ragan1.pdf
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    Bibliographic Info

    Article provided by Bank of Canada in its journal Bank of Canada Review.

    Volume (Year): 2005 (2005)
    Issue (Month): Autumn ()
    Pages: 41-50

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    Handle: RePEc:bca:bcarev:v:2005:y:2005:i:autumn05:p:41-50

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    Cited by:
    1. Stuart Landon & Constance Smith, 2010. "Energy Prices and Alberta Government Revenue Volatility," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 313, November.
    2. Laurence M. Ball, 2009. "Policy Responses to Exchange-Rate Movements," NBER Working Papers 15173, National Bureau of Economic Research, Inc.
    3. Garcia, Carlos J. & Restrepo, Jorge E. & Roger, Scott, 2011. "How much should inflation targeters care about the exchange rate?," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1590-1617.

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