Canada and the IMF: Trailblazer or Prodigal Son?
Canada played an important role in the postwar establishment of the International Monetary Fund (IMF), yet it was also the first major member to challenge the orthodoxy of the BrettonWoods par value system by abandoning it in 1950 in favour of a floating, market-determined exchange rate. Although the IMF heavily criticized this decision, Canada's trail-blazing experience demonstrated that a flexible exchange rate could operate in a stable and effective manner under a high degree of capital mobility. Equally important, it showed that monetary policy needs to be conducted differently under a flexible exchange rate and capital mobility. The remarkable stability of the dollar during the 1950s contradicted previous wisdom on floating exchange rates, which had predicted significant volatility. In May of 1962, Canada returned to the BrettonWoods system as a "prodigal son" after a period of controversial monetary policy and a failed attempt to depreciate the value of the Canadian dollar. The authors critically analyze the interaction between Canadian and IMF officials regarding Canada's exchange rate policy in view of the economic circumstances and the prevailing wisdom at the time. They also examine the impact on IMF research and policy, because the Canadian experience influenced the work of Rudolf Rhomberg as well as Robert Mundell and Marcus Fleming, resulting in the development of the Mundell–Fleming model. Thus, the Canadian experience with a floating exchange rate not only had important implications for the IMF and the BrettonWoods system, but also for macroeconomic theory and policy in open economies.
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- James M. Boughton, 2003. "On the Origins of the Fleming-Mundell Model," IMF Staff Papers, Palgrave Macmillan, vol. 50(1), pages 1.
- Michael D. Bordo & Angela Redish, 1990.
"Credible Commitment and Exchange Rate Stability: Canada's Interwar Experience,"
Canadian Journal of Economics,
Canadian Economics Association, vol. 23(2), pages 357-80, May.
- Michael D. Bordo & Angela Redish, 1987. "Credible Commitment and Exchange Rate Stability: Canada's Interwar Experience," NBER Working Papers 2431, National Bureau of Economic Research, Inc.
- Michael D. Bordo, 1993.
"The Bretton Woods International Monetary System: A Historical Overview,"
in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108
National Bureau of Economic Research, Inc.
- Michael D. Bordo, 1992. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
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