Working Paper: NBER ID: w13605
Authors: Michael D. Bordo; Ali Dib; Lawrence Schembri
Abstract: This paper revisits Canada's pioneering experience with floating exchange rate over the period 1950-1962. It examines whether the floating rate was the best option for Canada in the 1950s by developing and estimating a New Keynesian small open economy model of the Canadian economy. The model is then used to conduct a counterfactual analysis of the impact of different monetary policies and exchange rate regimes. The main finding indicates that the flexible exchange rate helped reduce the volatility of key macro-economic variables. The Canadian monetary authorities, however, clearly did not understand all of the implications of conducting monetary policy under a flexible exchange rate and a high degree of capital mobility. The paper confirms that monetary policy was more volatile in the post-1957 period and Canada's macroeconomic performance suffered as a result.
Keywords: flexible exchange rate; monetary policy; small open economy; Canada; counterfactual analysis
JEL Codes: E32; E37; F31; F32; N01
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| adoption of a flexible exchange rate (F31) | reduced volatility of key macroeconomic variables (E39) |
| pre-1957 monetary policy (E64) | reduced volatility in output and interest rates (E49) |
| flexible exchange rate (F31) | insulation from external shocks (F41) |
| fixed exchange rate (F31) | increased volatility of output and inflation (E39) |
| flexible exchange rate + ineffective monetary policies (F31) | increased volatility in the post-1957 period (N12) |
| sensible monetary policy under flexible exchange rate (F33) | effective economic management (E60) |