Despite Loonie's Strength, Pegging the Exchange Rate is Still a Bad Idea: C.D. Howe Institute



    TORONTO, Jan. 10 /CNW/ - Interest in fixing the Canada-US dollar exchange
rate has risen in recent months, along with provincial concerns about the high
dollar. But the idea is still as bad as ever, says eminent economist David
Laidler in an analysis from the C.D. Howe Institute.
    In Fixing the Exchange Rate: Still a Bad Idea, Laidler, a
Fellow-in-Residence at the Institute, says that Canada's floating exchange
rate does not move around gratuitously, but responds to economic influences
that would persist even if the rate was pegged. Fixing the rate, he warns,
could easily result in larger swings in inflation and unemployment.
    Dr. Laidler notes that movements in Canada's exchange rate mostly can be
explained by international demand for commodities. When markets for
commodities boom, foreign buyers purchase Canadian dollars to pay for them
and, under a floating exchange rate, bid up the loonie's price. If the
exchange rate was fixed, the Bank of Canada would need to create more Canadian
dollars for sale on the foreign market, he explained. Once issued, those
dollars would enter domestic circulation, creating inflationary pressure and
forcing the domestic inflation rate above the 2 percent target to which
Canadians have become accustomed. And when commodity prices fall again, a
fixed rate would need high interest rates to defend it.
    Laidler states that progress in creating a single domestic market for
goods and labour, reducing disincentives to investment in manufacturing and
elsewhere, and enhancing the labour force's skills and flexibility, will
result in policies that make it easier to cope with pressure from world
commodity markets.
    This study is available at: http://www.cdhowe.org/pdf/ebrief_53.pdf.





For further information:

For further information: David Laidler, Fellow in Residence, C.D. Howe
Institute, (416) 865-1904, cdhowe@cdhowe.org


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