The lines of reasoning that have been advanced over the past few months in favour of slowing the appreciation of the Canadian dollar can be broken down into two categories:
Good: An appreciating currency is disinflationary, and inflation was running below the Bank of Canada's target. Intervening to slow the rate of appreciation would help the Bank reach its objective.
Bad: An appreciating currency hurts exporters. Two centuries after its death, the mercantilist ghost still haunts our editorial pages. Why? Why? Why?
The good case was at its most convincing when the September CPI numbers were released. (This was also when we learned that an alarming number of 'experts' didn't understand second-year macroeconomics.) Inflation was falling further and further from its target, and the Bank had already hit the interest rate lower bound.
Since then, that argument has weakened. The CAD has stayed in the 0.93-0.95USD range, and inflation has moved towards the 2% target:
The pressures behind a long-run CAD appreciation against the USD haven't gone away, but they are no longer much of a short-run concern for monetary policy.
Yes, things are looking more cheerful for Canada, especially with today's CPI release. A worsening of the US situation, or fear of a collapse of the Euro, are to my mind the biggest dangers to Canada from abroad. We do a lot more trade with the US than with the Eurozone (and the elasticities of net exports wrt the US$ are probably bigger than wrt the Euro), but the Euro is more of a wild card. It's not even impossible that the Loonie might emerge as a "safe haven" currency?
Posted by: Nick Rowe | December 17, 2009 at 12:04 PM
"An appreciating currency hurts exporters. Two centuries after its death, the mercantilist ghost still haunts our editorial pages. Why? Why? Why?"
Stehpen:
Can you explain that statment a bit? Even the BoC seemed to think the appreciating currency could stiffle recovery.
Posted by: Matthew | December 17, 2009 at 05:00 PM