IDEAS home Printed from https://ideas.repec.org/p/bca/bocawp/01-3.html
   My bibliography  Save this paper

On Commodity-Sensitive Currencies and Inflation Targeting

Author

Listed:
  • Kevin Clinton

Abstract

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.

Suggested Citation

  • Kevin Clinton, 2001. "On Commodity-Sensitive Currencies and Inflation Targeting," Staff Working Papers 01-3, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-3
    as

    Download full text from publisher

    File URL: https://www.bankofcanada.ca/wp-content/uploads/2010/02/wp01-3.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
    2. Arthur Grimes & Jason Wong, 1992. "The role of the exchange rate in New Zealand monetary policy," Proceedings, Federal Reserve Bank of San Francisco, pages 176-197.
    3. David Gruen & Tro Kortian, 1996. "Why Does the Australian Dollar Move so Closely with the Terms of Trade?," RBA Research Discussion Papers rdp9601, Reserve Bank of Australia.
    4. Neary, J Peter & Purvis, Douglas D, 1982. " Sectoral Shocks in a Dependent Economy: Long-run Adjustment and Short-run Accommodation," Scandinavian Journal of Economics, Wiley Blackwell, vol. 84(2), pages 229-253.
    5. Kevin Clinton & Mark Zelmer, 1997. "Constraints on the Conduct of Canadian Monetary Policy in 1990s: Dealing with Uncertainty in Financial Markets," Technical Reports 80, Bank of Canada.
    6. Gerlach, Stefan & Smets, Frank, 2000. "MCIs and monetary policy," European Economic Review, Elsevier, vol. 44(9), pages 1677-1700, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Silvia Sgherri, 2008. "Explicit and implicit targets in open economies," Applied Economics, Taylor & Francis Journals, vol. 40(8), pages 969-980.
    2. Gilles Dufrénot & Kimiko Sugimoto, 2013. "West African Single Currency and Competitiveness," Review of Development Economics, Wiley Blackwell, vol. 17(4), pages 763-777, November.
    3. Céline Gauthier & David Tessier, 2002. "Supply Shocks and Real Exchange Rate Dynamics: Canadian Evidence," Staff Working Papers 02-31, Bank of Canada.
    4. Craig Beaumont & Li Cui, 2007. "Conquering Fear of Floating; Australia's Successful Adaptation to a Flexible Exchange Rate," IMF Policy Discussion Papers 07/2, International Monetary Fund.
    5. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Staff Working Papers 01-5, Bank of Canada.
    6. Silvia Sgherri, 2008. "Explicit and implicit targets in open economies," Applied Economics, Taylor & Francis Journals, vol. 40(8), pages 969-980.
    7. Gilles Duffrenot & Kimiko Sugimoto, 2010. "Pegging the future West African single currency in regard to internal/external competitiveness: a counterfactual analysis," William Davidson Institute Working Papers Series wp974, William Davidson Institute at the University of Michigan.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume (Discontinued), in: Philip Lowe (ed.),Monetary Policy and Inflation Targeting, Reserve Bank of Australia.
    2. McCallum, Bennett T, 2000. "Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 870-904, November.
    3. David Longworth & Brian O´Reilly, 2002. "The Monetary Policy Transmission Mechanism and Policy Rules in Canada," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series (ed.),Monetary Policy: Rules and Transmission Mechanisms, edition 1, volume 4, chapter 13, pages 357-392, Central Bank of Chile.
    4. Richard Dennis, 1997. "A measure of monetary conditions," Reserve Bank of New Zealand Discussion Paper Series G97/1, Reserve Bank of New Zealand.
    5. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    6. David Mayes & Matti Virén, 2000. "The exchange rate and monetary conditions in the Euro area," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(2), pages 199-231, June.
    7. Jean-Paul Lam & Greg Tkacz, 2004. "Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 89-126, March.
    8. Wai-Ching Poon, 2010. "A monetary policy rule: The augmented Monetary Conditions Index for Philippines using UECM and bounds tests," Monash Economics Working Papers 04-10, Monash University, Department of Economics.
    9. Marek Jarocinski & Frank Smets, 2008. "House prices and the stance of monetary policy," Review, Federal Reserve Bank of St. Louis, vol. 90(Jul), pages 339-366.
    10. Wai Ching Poon, 2010. "Augmented MCi: AN Indicator Of Monetary Policy Stance For ASEAN-5?," Monash Economics Working Papers 25-10, Monash University, Department of Economics.
    11. Ben Hunt & Adrian Orr, 1999. "Inter-forecast monetary policy implementation: responding to unexpected exchange rate movements," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
    12. Tiffany Hutcheson, 2000. "Trading in the Australian Foreign Exchange Market," Working Paper Series 107, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    13. Demir, İshak, 2014. "Monetary policy responses to the exchange rate: Empirical evidence from the ECB," Economic Modelling, Elsevier, vol. 39(C), pages 63-70.
    14. Matkovskyy, Roman, 2013. "To the Problem of Financial Safety Estimation: the Index of Financial Safety of Turkey," MPRA Paper 47673, University Library of Munich, Germany.
    15. Bofinger, Peter & Wollmershauser, Timo, 2001. "Is there a third way to EMU for the EU accession countries?," Economic Systems, Elsevier, vol. 25(3), pages 253-274, September.
    16. Andreas Pfingsten & Reiner Wolff, 1995. "Resource booms in competitive equilibria with decreasing returns to scale," Journal of Economics, Springer, vol. 61(2), pages 185-200, June.
    17. Clements, Kenneth W. & Fry, Renée, 2008. "Commodity currencies and currency commodities," Resources Policy, Elsevier, vol. 33(2), pages 55-73, June.
    18. Pilar Poncela & Eva Senra & Lya Paola Sierra, 2017. "Long-term links between raw materials prices, real exchange rate and relative de-industrialization in a commodity-dependent economy: empirical evidence of “Dutch disease” in Colombia," Empirical Economics, Springer, vol. 52(2), pages 777-798, March.
    19. James Yetman, 2001. "Gaining Credibility for Inflation Targets," Staff Working Papers 01-11, Bank of Canada.
    20. Berger, Tino & Kempa, Bernd, 2012. "Taylor rules and the Canadian–US equilibrium exchange rate," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1060-1075.

    More about this item

    Keywords

    Exchange rates; Inflation targets; International topics; Monetary policy implementation;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bca:bocawp:01-3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/bocgvca.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.