EconomyWorld

Currency inflation in Canada

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

Currency inflation

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.

Currency inflation in Canada

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.

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