Some Aspects of the Canadian Experience with Flexible Exchange Rates in the 1970s

Abstract

In this study, the authors examine three aspects of the Canadian experience with flexible exchange rates in the 1970s: the movements in the Canadian dollar-U.S. dollar exchange rate, the sharp growth of external borrowings by Canadians in the 1974-76 period, and the real effects of relative price movements. Several theoretical and empirical exchange rate models are found to have done poorly in explaining the movements of the value of the Canadian dollar over the decade. In the examination of external borrowings in the mid-1970s, it is concluded that there was some response in borrower and lender behaviour to movements in nominal long-term interest rate differentials. Four sources of explanation for such behaviour are examined. A three-sector model comprising non-tradable goods, resource-based tradable goods and non resource-based tradable goods, is used to study the effects of changes in raw material prices, domestic unit labour costs, and the exchange rate on various real variables in the Canadian economy.