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Costs And Benefits Of Exchange Rate Stability: Canada'S Interwar Experience

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  • MICHAEL D. BORDO
  • ANGELA REDISH

Abstract

In January 1929, the Canadian government suspended gold exports and implemented a floating exchange rate regime that endured until the onset of World War II. In sharp contrast to the experience of other countries that left the gold standard, Canada's deflation and declining economic activity continued until 1933. This paper examines why the Canadian government chose to follow a restrictive monetary policy and how that policy affected the Canadian exchange rate. We show that the chosen policy was rational—given the government's assumptions and objectives—and that it was consistent with fiscal policy. In so doing, we argue that the government's commitment to monetary stability was credible. We show that one can explain the Canadian exchange rate's behavior by a simple expectations‐based model of exchange rate determination, given external events and the government's monetary policy.

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  • Michael D. Bordo & Angela Redish, 1988. "Costs And Benefits Of Exchange Rate Stability: Canada'S Interwar Experience," Contemporary Economic Policy, Western Economic Association International, vol. 6(2), pages 115-130, April.
    • Handle: RePEc:bla:coecpo:v:6:y:1988:i:2:p:115-130
    DOI: 10.1111/j.1465-7287.1988.tb00288.x
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    References listed on IDEAS

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    1. Bordo, Michael D. & Redish, Angela, 1987. "Why Did the Bank of Canada Emerge in 1935?," The Journal of Economic History, Cambridge University Press, vol. 47(2), pages 405-417, June.
    2. Eichengreen, Barry & Portes, Richard, 1986. "The Anatomy of Financial Crises," CEPR Discussion Papers 130, C.E.P.R. Discussion Papers.
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