5. The Exchange Rate Regime and Canada's Monetary Order

Principles of Macroeconomics (with Xtra!)

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Unformatted text preview: Bank of Canada Banque du Canada Working Paper 99-7/Document de travail 99-7 The Exchange Rate Regime and Canada’s Monetary Order by David Laidler ISSN 1192-5434 ISBN 0-662-27770-8 Printed in Canada on recycled paper Bank of Canada Working Paper 99-7 March 1999 The Exchange Rate Regime and Canada’s Monetary Order by David Laidler Visiting Economist and Special Adviser Bank of Canada Ottawa, Canada K1A 0G9 dlaidler@bank-banque-canada.ca The views expressed in this paper are those of the author. No responsibility for them should be attributed to the Bank of Canada. Contents Acknowledgements........................................................................................................................ iv Abstract............................................................................................................................................v 1. Introduction..................................................................................................................................1 2. The role of the exchange rate in the current monetary order.......................................................3 3. Criticisms of Canada’s flexible exchange rate .............................................................................5 4. North American Monetary Union as a monetary order ...............................................................9 5. A currency board........................................................................................................................13 6. A legislatively fixed exchange rate ............................................................................................15 7. A pegged exchange rate .............................................................................................................17 8 Concluding comments ................................................................................................................21 References......................................................................................................................................22 Acknowledgements I am grateful to Pierre Duguay, Chuck Freedman, Paul Jenkins, John Murray, James Powell, Ted Requard, Larry Schembri, and Mark Zelmer for comments on an earlier draft of this paper. I am also grateful to Peter Spiro for helpful discussions of productivity growth questions. iv Abstract 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)...
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