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On Commodity-Sensitive Currencies and Inflation Targeting

  • Clinton, Kevin

Two aspects of the recent monetary history of Canada, Australia, and New Zealand stand out: the sensitivity of their dollars to prices of resource-based commodities, and inflation targeting. This paper explores various aspects of these phenomena. It uses standard empirical models, and an investigation of the different approaches to inflation targeting in the three countries—including a case study of the 1998 international financial crisis—to assess how well a floating currency serves a resource-rich economy, and how monetary policy ought to be conducted during periods of turbulence in commodity and currency markets. The broad swings and cycles in the Canadian, Australian, and New Zealand dollars are found to have been helpful to macroeconomic stability. It appears that the most effective monetary policy approach focuses on domestic inflation control over the medium term. In a crisis of confidence in the financial markets, of the kind that sporadically affected the Canadian dollar in the first half of the 1990s, a case can be made for short-term monetary actions to stabilize expectations. Apart from crisis situations, as long as a credible low-inflation policy is followed, monetary policy does not have to be concerned with the exchange rate per se.

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Paper provided by Bank of Canada in its series Working Papers with number 01-3.

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Length: 52 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:bca:bocawp:01-3
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