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The Exchange Rate and Canadian Inflation Targeting

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Author Info
Christopher Ragan

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Abstract

The author provides a non-technical explanation of the role played by the exchange rate in Canada's inflation-targeting monetary policy. He reviews the motivation for inflation targeting and describes the monetary transmission mechanism. Though the exchange rate is an integral component of the transmission mechanism, the author explains why it is not a target for monetary policy. He provides a simple taxonomy for exchange rate movements, distinguishing between movements associated with direct shocks to aggregate demand and those unrelated to such direct shocks. He explains the importance to monetary policy of determining the cause of any given movement in the exchange rate, and of determining the net effect on aggregate demand. The author also describes Canadian monetary policy during the 2003-04 period, a time when the Canadian dollar appreciated sharply against the U.S. dollar.

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File URL: http://www.bankofcanada.ca/en/res/wp/2005/wp05-34.pdf
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Publisher Info
Paper provided by Bank of Canada in its series Working Papers with number 05-34.

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Length: 41 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-34

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Web page: http://www.bank-banque-canada.ca/

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Related research
Keywords: Exchange rates; Inflation targets; Monetary policy implementation;

Other versions of this item:

Find related papers by JEL classification:
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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References listed on IDEAS
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  1. Tiff Macklem, 2001. "A New Measure of Core Inflation," Bank of Canada Review, Bank of Canada, vol. 2001(Autumn), pages 3-12. [Downloadable!]
  2. Jean Farès & Gabriel Srour, 2001. "The Monetary Transmission Mechanism at the Sectoral Level," Working Papers 01-27, Bank of Canada. [Downloadable!]
  3. Robert Lafrance & Lawrence Schembri, 2002. "Purchasing-Power Parity: Definition, Measurement, and Interpretation," Bank of Canada Review, Bank of Canada, vol. 2002(Autumn), pages 27-33. [Downloadable!]
  4. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, vol. 49(6), pages 1543-1569, August. [Downloadable!] (restricted)
    Other versions:
  5. Murray, John, 2000. "Why Canada needs a flexible exchange rate," The North American Journal of Economics and Finance, Elsevier, vol. 11(1), pages 41-60, August. [Downloadable!] (restricted)
  6. Willem H. Buiter & Douglas D. Purvis, 1983. "Oil, Disinflation, and Export Competitiveness: A Model of the "Dutch Disease"," NBER Working Papers 0592, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Jiri Jonas & Frederic S. Mishkin, 2003. "Inflation Targeting in Transition Countries: Experience and Prospects," NBER Working Papers 9667, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Lucio Sarno & Mark P. Taylor, 2002. "Purchasing Power Parity and the Real Exchange Rate," IMF Staff Papers, Palgrave Macmillan Journals, vol. 49(1), pages 5. [Downloadable!] (restricted)
  9. Engert, Walter & Selody, Jack, 1998. "Uncertainty and Multiple Paradigms of the Transmission Mechanism," Working Papers 98-7, Bank of Canada. [Downloadable!]
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