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Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s: (Hard) Lessons Learned for Monetary Policy in a Small Open Economy

Author

Listed:
  • Michael Bordo
  • Ali Dib
  • Lawrence L. Schembri

Abstract

This paper revisits Canada's pioneering experience with floating exchange rate over the period 1950–1962. It examines whether the floating rate was the best option for Canada in the 1950s by developing and estimating a New Keynesian small open economy model of the Canadian economy. The model is then used to conduct a counterfactual analysis of the impact of different monetary policies and exchange rate regimes. The main finding indicates that the flexible exchange rate helped reduce the volatility of key macroeconomic variables. The Canadian monetary authorities, however, clearly did not understand all of the implications of conducting monetary policy under a flexible exchange rate and a high degree of capital mobility. The paper confirms that monetary policy was more volatile in the post-1957 period and Canada's macroeconomic performance suffered as a result.

Suggested Citation

  • Michael Bordo & Ali Dib & Lawrence L. Schembri, 2007. "Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s: (Hard) Lessons Learned for Monetary Policy in a Small Open Economy," Staff Working Papers 07-45, Bank of Canada.
    • Handle: RePEc:bca:bocawp:07-45
    DOI: 10.34989/swp-2007-45
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    Cited by:

    1. Michael D. Bordo & Christopher M. Meissner, 2015. "Growing Up to Stability? Financial Globalization, Financial Development and Financial Crises," NBER Working Papers 21287, National Bureau of Economic Research, Inc.
    2. Siklos, Pierre L., 2009. "Not quite as advertised: Canada's managed float in the 1950s and Bank of Canada intervention," European Review of Economic History, Cambridge University Press, vol. 13(3), pages 413-435, December.
    3. Kwo Ping Tam, 2016. "A New Comparative Study On The Free-Floating And Currency Board Regimes In Hong Kong," Bulletin of Economic Research, Wiley Blackwell, vol. 68(3), pages 218-238, April.
    4. Pierre L. Siklos, 2010. "Revisiting the Coyne Affair: a singular event that changed the course of Canadian monetary history," Canadian Journal of Economics, Canadian Economics Association, vol. 43(3), pages 994-1015, August.
    5. Michael D. Bordo & Owen F. Humpage & Anna J. Schwartz, 2015. "US Intervention during the Bretton Woods Era, 1962–1973," NBER Chapters, in: Strained Relations: US Foreign-Exchange Operations and Monetary Policy in the Twentieth Century, pages 120-209, National Bureau of Economic Research, Inc.
    6. Thomas J Carter & Rhys Mendes & Lawrence L Schembri, 2018. "Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    7. Chayawadee Chai-anant & Runchana Pongsaparn & Kessarin Tansuwanarat, 2008. "Roles of Exchange Rate in Monetary Policy under Inflation Targeting: A Case Study for Thailand," Working Papers 2008-03, Monetary Policy Group, Bank of Thailand.

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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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