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I am amazed by the general level of complacency around the depreciation in the Canadian dollar.

It is nothing like the concerns that were once raised in the depreciation episodes of several decades ago.

"I used OLS on time series data without first differencing nor did I make any other allowance for time series issues like stationarity"

Quite. Although it is also possible that a cointegrateed combination wouldb stationary. Even so, there could be latent confounding effects. And shouldn't you be checking whether the OIL/IR time series "Granger causes" a lagged copy of the FX series?

1. very worth to look at your Current account (which is negative) and the time development

2. commodity/oil prices

according to the CIA world factbook:

oil seems to be 12% of your export revenue (dropped by a factor of 2)
refined petroleum another 6 - 12% (dropping maybe 30 % ?)
natural gas ? should have dropped in price too
(iron ore or other commodities ?)

that seems to add up to something like 25% - 30% of your total exports

If that drops by a factor 50%, that warrants a factor 50% *25 % in exchange rate, maybe easier to understand with:

3. the brutal & simple ( = textbook : - ) example Russian Ruble

http://de.slideshare.net/genauer/sampler-of-gdp-and-other-data-emphasis-on-russia, page 4

Given that oil dominates Russian export ( and the Government revenue !)

thr Ruble exchange rate is simply given by Ruble * Brent Oil price = constant (adjusted over time for an inflation of about 9%).

The one calibration constant (63*63) is given by the popular Russian joke:

What have the ruble, oil, and Putin in common ?

They all turn 63 in 2015 :-)

When they didn't go by that in 2008, that had a very drastic impact on their foreign reserves (page 6)

I did plot, btw, the Canadian provincial unemployment rates in http://de.slideshare.net/genauer/sampler-2-of-imf-2014-weo-data-plots, page 2

@Phil Koop:

> And shouldn't you be checking whether the OIL/IR time series "Granger causes" a lagged copy of the FX series?

I don't think that would be visible from a yearly data series. I'd expect the variables to mostly be in equilibrium at that time scale.

I believe Mike Moffat had a model that showed more or less the same thing you found. He used to post about it occasionally. I'm too lazy to search for it, but it's probably there somewhere.

JKH: I'd hate to see what the adjustment would look like if the dollar wasn't floating.

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