The Exchange Rate Regime and Canada's Monetary Order
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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References listed on IDEAS
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- Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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- 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.
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