Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s:(Hard) Lessons Learned for Monetary Policy in a Small Open Economy

52 Pages Posted: 14 Nov 2007 Last revised: 3 Oct 2010

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Ali Dib

Bank of Canada - Department of Monetary and Financial Analysis

Lawrence L. Schembri

Government of Canada - International Relations Department

Date Written: November 2007

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.

Suggested Citation

Bordo, Michael D. and Dib, Ali and Schembri, Lawrence L., Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s:(Hard) Lessons Learned for Monetary Policy in a Small Open Economy (November 2007). NBER Working Paper No. w13605. Available at SSRN: https://ssrn.com/abstract=1029946

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ali Dib

Bank of Canada - Department of Monetary and Financial Analysis ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada
613-782-7851 (Phone)

Lawrence L. Schembri

Government of Canada - International Relations Department ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

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