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The Exchange Rate Regime and Canada's Monetary Order

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  • Laidler, David

Abstract

It is a mistake to debate the merits of alternative exchange rate regimes for Canada independently of other features of the monetary order. A coherent order requires a well-defined goal for monetary policy, one that the authorities are capable of achieving, and that anchors private sector expectations. For it to be liberal, the relevant authorities should be accountable to the electorate for their performance. These criteria are applied in comparing the merits of: (i) Canada’s current monetary order, based on inflation targets and a flexible exchange rate; (ii) a North American monetary union; (iii) a Canadian currency board; (iv) a legislatively fixed exchange rate; and (v) an adjustably pegged exchange rate. The paper concludes that the current order is well-conceived because cross-border labour mobility is limited, Canadian money wages and prices are sticky, and the real exchange rate between Canada and the United States is subject to real shocks. Among the fixed exchange rate options, all of which are inferior to current arrangements, a full monetary union is judged the most economically viable, though politically illiberal, while a pegged rate seems to provide an untrustworthy basis for a coherent monetary order.

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Bibliographic Info

Paper provided by Bank of Canada in its series Working Papers with number 99-7.

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Length: 32 pages
Date of creation: 1999
Date of revision:
Handle: RePEc:bca:bocawp:99-7

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Keywords: Exchange rates; Monetary policy framework;

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References

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  1. Nickell, Stephen J, 1996. "Competition and Corporate Performance," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 724-46, August.
  2. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
  3. Baldwin, John R., 1996. "Productivity Growth, Plant Turnover and Restructuring in the Canadian Manufacturing Sector," Analytical Studies Branch Research Paper Series 1995087e, Statistics Canada, Analytical Studies Branch.
  4. Murray, J. & Van Norden, S. & Vigfusson, R., 1996. "Excess Volatility and Speculative Bubbles in the Canadian Dollar: Real of Imagined?," Technical Reports 76, Bank of Canada.
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Citations

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Cited by:
  1. Liliane Karlinger, 2002. "The Impact of Common Currencies on Financial Markets: A Literature Review and Evidence from the Euro Area," Working Papers 02-35, Bank of Canada.
  2. Jeannine Bailliu & Robert Lafrance & Jean-François Perrault, 2002. "Does Exchange Rate Policy Matter for Growth?," Working Papers 02-17, Bank of Canada.
  3. Osakwe, Patrick & Schembri, Lawrence, 1999. "Real Effects of Collapsing Exchange Rate Regimes: An Application to Mexico," Working Papers 99-10, Bank of Canada.
  4. Fabio Ghironi, 2000. "Alternative Monetary Rules for a Small Open Economy: The Case of Canada," Boston College Working Papers in Economics 466, Boston College Department of Economics, revised 30 Oct 2000.
  5. Ronald I. McKinnon, 1999. "Limiting moral hazard and reducing risk in international capital flows: the choice of an exchange-rate regime," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  6. Willem H. Buiter, 1999. "The EMU and the NAMU: What is the Case for North American Monetary Union?," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 285-305, September.
  7. Vivek H. Dehejia & Nicholas Rowe, 1999. "Macroeconomic Stabilisation: Fixed Exchange Rates vs Inflation Targeting vs Price Level Targeting," Carleton Economic Papers 99-15, Carleton University, Department of Economics, revised Mar 2000.
  8. Jack L. Carr & John E. Floyd, 2001. "Real and Monetary Shocks to the Canadian Dollar: Do Canada and the U.S Form an Optimal Currency Area?," Working Papers floyd-01-02, University of Toronto, Department of Economics.
  9. Heliodoro Temprano Arroyo, 2002. "Latin America's integration processes in the light of the EU's experience with EMU," European Economy - Economic Papers 173, Directorate General Economic and Monetary Affairs, European Commission.
  10. David Laidler, 1999. "Canada's Exchange Rate Options," Canadian Public Policy, University of Toronto Press, vol. 25(3), pages 324-332, September.
  11. Lafrance, Robert & St-Amant, Pierre, 2000. "Les zones monétaires optimales," L'Actualité Economique, Société Canadienne de Science Economique, vol. 76(4), pages 577-612, décembre.

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