Canadian exchange rate fluctuations are often a popular topic in Canadian people’s conversations
about the economy and monetary policy of the Bank of Canada. After the Asian catastrophe towards the end
For example, in 1990 the Canadian dollar fell from 74 cents (US) in the summer of 1997.
to about 65 cents (US) after one year. As the world economy recovered from the era
of growth slow a few years later, the Canadian dollar gained about 30 percent,
63 cents (US) in early 2002 to about 85 cents (US) by the end of 2004.
Such movements in exchange rates have significant implications for the Canadian population
economically, but there are differences of opinion as to how the Bank should respond to that
changes. Some observers, apparently accompanied by strong cash, say the Bank should
prevent a sharp decline in the Canadian dollar. Others, obviously not supporters
of a weak currency, argue that the Bank should take action to prevent important information about
the Canadian dollar. Both arguments seem to be based on the assumption that there is a “right” value
in the Canadian exchange rate and the Bank should prevent the real exchange rate from flowing
deviation is too far from this number.
This paper provides a non-technical explanation of how the exchange rate fits into
Banking policy monetary policy.1
Four important points were made. First, the dynamic exchange
rate is an important part of the Bank’s overall policy of keeping inflation low
he is stable. Second, the Bank does not refer to any specific exchange rate; i
the exchange rate is determined by the market. Third, the exchange rate movement is very large
It is important in conducting monetary policy, for two reasons: (i) they often reflect events in
The Canadian and/or global economy has a direct impact on Canadian integrated demand,
and (ii) makes changes to related values, which also contribute to Canadian integration
needs. Fourth, following any movement given the exchange rate is the correct answer
because monetary policy is highly dependent on the cause of the movement.
Only by decision
the reason for the exchange rate movement is likely to determine the overall impact on Canadians
to integrate the need as well as the appropriate response, if any, of monetary policy.
This paper is organized as follows. Section 2 reviews the cause of inflation
direct and provides a simplified view of the transfer of monetary policy — the
a complex chain of causes and effects on which Bank policy actions have an impact
on commodity prices, aggregate demand, the gap between actual product and probability, and inflation. Here
exchange rate movements are reflected in both the effect of other changes in the economy
and the cause of other changes. As will be clear, the exchange rate is an essential part of
how transfer money to a small open economy.
Sections 3 and 4 provide a simple taxonomy of the two types of exchange rate movements. Because
for analytical purposes, I distinguish between the exchange rate movements that end up showing
and resulting in changes in the demand for Canadian goods and services and enter
the exchange rate created by events that do not directly affect the need for Canadian aggregate.
Another example of the first type is the growth of global income which makes an increase in relative
the need for Canadian exports and the appreciation of the Canadian dollar. An example of
the second type is the adjustment of international commodity portfolios resulting in an increase in the value
of the related demand for Canadian assets and the value of the Canadian dollar. For several
illustrative examples, I explain the type of exchange rate movement, the impact of the net on
Combined Canadian demand, and implications for monetary policy.
Section 5 explains why the implementation of monetary policy is difficult
both types of exchange rate movements often occur simultaneously. In this case, the
The monetary policy challenge is to assess the relative importance of each type of exchange rate
movement and thus determined the full impact of the combined Canadian quest. Monetary policy
is also complicated by the uncertainty about the possible timing of any movement in trading
measurement, and uncertainty about the size and duration of the connection
between exchange rate movements and successive changes in residual trading. The category
concludes by providing a brief overview of Canada’s monetary policy during 2003-04
while the Canadian dollar is compared to the American dollar. I show that
The analytical difference between the two types of exchange rate variables gives the lens a use
which one can explain the actions of the Bank of Canada. Section 6 provides some conclusions.
The main objective of the Bank is to make a positive contribution to the economy
if they are Canadians. Based on the largest theoretical and scientific research, the Bank
The policy (and that of other major banks) is based on two main proposals:
(i) high inflation hurts the economy and costs individuals and firms, too
(ii) monetary policy cannot have a systematic and sustainable effect on any economic
variable without an inflation rate.
In times of moderate inflation, the annual inflation rate is generally unstable
and therefore difficult to predict (Friedman 1977). High inflation also increases flexibility as well
as the volatility of related prices of goods and services (Longworth 2002). Hence the inflation rate
often entails intense economic uncertainty and undermines the ability
of a price system to convey accurate signals of shortages by related price movements. Like
as a result, higher inflation leads firms and individuals to make mistakes in their daily lives
use, activity, and investment decisions that will not be of a lower cost
nature. This is the context in which the issue of inflation is stable and stable.
There is ample evidence that monetary policy can have far-reaching effects on real
economic dynamics such as outflow and employment in very short ―, intermediate periods
the actions of the banks would not have been closely followed by the media and financial markets if they had
it’s not fair. But your weight on both the theory and the strong evidence in Canada and other countries raises
that monetary policy does not have a systematic and continuous impact on economic dynamics without
The inflation rate, for reasons well, known and perhaps clearly defined by Friedman (1968).
If high inflation is costly, then monetary policy could have lasting effects on the rate of
inflation, it is not surprising that most major banks are now going to take inflation as
the main purpose. By providing an environment where inflation is kept low and relatively low
a stable — where private and individual firms can easily organize and succeed — the Bank
makes its most significant contribution to the overall well-being of the Canadian people.
Within the current framework of the Bank to regulate inflation, the official policy objective is this
inflation rate, and the Bank’s objective is to maintain the annual inflation rate for the consumer
the price index (CPI) is close to 2 percent and stable within the target band of 1–3 percent.
Given the volatility of certain products, the Bank is paying close attention to it
“basic” inflation behavior, obtained by eight highly variable output
elements from a comprehensive CPI estimate of inflation and adjustment of residual components
the effects of indirect tax changes (Macklem 2001). Although the main inflation and the total CPI
inflation tend to deviate from each other for short periods of time, closely aligned
over the long term, which shows that the trends of inflation are one-off
similar in width.
