Stephen Gordon explains how the Canadian economy has benefitted from the independent Canadian dollar:
Let’s think about what would have happened over the past few years if a monetary union had already been in place. Instead of generating an appreciation of the Canadian dollar, the commodity boom would have drawn in larger and destabilizing flows of investment. As it was, the appreciation of the Canadian dollar tempered the flow of capital, and kept inflation under control.
When the recession hit and commodity prices fell, our floating currency gave us a 20 per cent exchange rate depreciation in the space of five months. This sort of stimulus would have been unavailable under a monetary union — as Spain is now finding out, to its great cost.
For reasons that Paul Krugman explains here, Canada has always been an interesting case study in international monetary policy. Canada’s decision to adopt a floating exchange rate in 1950 — several decades before the post-war Bretton Woods system of fixed exchange rates collapsed — was an unorthodox reaction to a situation with which we’ve become familiar: sharply fluctuating commodity prices.
Wine experts usually explain price movements by supply-side factors such as the effects of the weather and age, but research by Serhan Cevik and Tahsin Saadi Sedik, economists at the IMF, finds that supply has only a small impact on prices. Instead, fast economic growth in emerging economies has been much more important in recent years — as is the case for oil and other commodity prices.
