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Apr 09, 2013

New Mowat Centre research on a better approach to Canada’s exchange rate policy.

April 9, 2013

More Stability, Please: A New Policy Approach to Canada’s Exchange Rate

Toronto  The Mowat Centre at the School of Public Policy & Governance at the University of Toronto has released a new research paper analyzing the harmful effects of exchange rate fluctuations on Canada’s economy. More Stability, Please: A New Policy Approach to Canada’s Exchange Rate, by economist Peter Spiro, provides clear evidence that the substantial increase in the value of the Canadian dollar has directly contributed to a loss of competitiveness in both the manufacturing and the services sector.

“Although the Canadian dollar is frequently referred to as a ‘petrocurrency’, the magnitude of its appreciation runs counter to the logic of economic fundamentals,” says Peter Spiro, author of the study.

The analysis suggests that a significant reason for the rise in the value of the Canadian dollar is speculation and investors seeking a safe haven from uncertain international markets.

“The money coming into Canada is not related to real investment, but is being invested in bonds and money market paper,” Spiro observes.

“A rising exchange rate due to these inflows has the perverse effect of making economic growth weaker and government deficits larger.”

To help reduce volatility for Canadian businesses and to strengthen Canada’s export sectors, the analysis suggests a more active role be taken by the Bank of Canada. Since a less volatile currency would benefit both Canadian consumers and businesses, the Bank of Canada could discourage much of the speculative investment the country is currently experiencing by communicating that there are upper limits on the value of the Canadian dollar.

In this context, “a change of leadership at the Bank of Canada provides it with an opportunity to more clearly signal that it will take measures to prevent extreme volatility and over-valuation in the Canadian dollar driven by speculation”, says Matthew Mendelsohn, Director of the Mowat Centre.

Read the full report