Download John Murray

“Adjusting to a Higher Canadian Dollar”
Presentation to a conference organized
by
Global Insight
Toronto, Ontario
13 September 2005
John Murray
Adviser to the Governor
OUTLINE
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Putting the appreciation in perspective
Economic factors underlying the appreciation
Effects of higher energy prices on the dollar
Regional and sectoral adjustments
Implications for monetary policy
2
Putting the Appreciation in
Perspective
• Movements in the Canadian dollar over the last 30
years (Chart 1)
• Movements of the Canada dollar relative to other
currencies (Chart 2 and 3)
• Bilateral versus effective exchange rate measures
(Chart 4)
• The importance of the Can-US dollar exchange rate
to Canada
3
Chart 1
4
Chart 2
5
Chart 3
6
Chart 4
7
Economic Factors Underlying
the Appreciation
• Canada as an important commodity producer and
exporter
• The “magic” Bank of Canada exchange rate
equation
• Recent forecast errors and the role of energy
(Chart 5)
• Other factors that might be at play – global
imbalances and productivity
• Simulations with modified specifications of our
equation (Chart 6 and 7, and Table 1)
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Chart 5
9
Chart 6
10
Chart 7
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Table 1
Real Exchange Rate Equations: 1973Q1-1999Q4a

a
a'
COMt-1
ENERt-1
ENER1t-1
PRODt-1
INTDIFFt-1
USCURt-6
Statistics
R2
DW
AvN
MAvN
BDS
HILZ
-0.15 (0.03)
2.08 (0.34)
--0.44 (0.07)
0.09 (0.04)
---0.66 (0.12)
--
-0.18 (0.04)
3.29 (0.56)
-0.90 (0.47)
-0.47 (0.07)
-0.17 (0.10)
0.21 (0.04)
--0.60 (0.13)
--
-0.11 (0.03)
2.84 (0.54)
--0.50 (0.11)
0.01 (0.05)
---0.58 (0.14)
0.64 (0.16)
-0.16 (0.04)
2.77 (0.37)
--0.51 (0.08)
--0.82 (0.32)
-0.59 (0.14)
--
0.22
1.26
0.28
1.43
0.30
1.59
0.22
1.36
a. Newey-West HAC standard errors in parentheses with p-values larger than 0.10 denoted in bold.
1. The real variables ENER and COM are defined as the nominal U.S. dollar price for energy and non-energy commodities
divided by the U.S. GDP deflator.
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The Effects of Higher Energy
Prices on the Economy
• Potential benefits – higher investment, higher oil
revenues, higher tax revenues, higher royalty
payments, higher net wealth and an improvement in
our terms of trade
• Potential costs – reduced household disposable
income, higher production costs, lower profits
(outside the energy sector), short-run adjustment
costs, regional and sectoral imbalances
• Canada as a major energy exporter – short term
costs versus long-term gains
13
Regional and Sectoral
Adjustments
• The effects of higher energy and non-energy commodity
prices
• Favoured regions mainly (but not exclusively) in the west
• Favoured sectors mainly (but not exclusively) in the
resource and distribution sectors (Chart 8 and 9)
• Adjustment response of the tradeables manufacturing sector
(Table 2)
• How is the adjustment proceeding? Some encouraging
signs
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Chart 8
Effects of Appreciation by Sector
6
Natural resources
and manufacturing
10
Wholesale and retail
trade
40
Other
23
All firms
0
10
20
30
Adverse
40
50
Neutral
60
70
80
90
100
Favourable
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Chart 9
Firms Adversely Affected: Main Reactions (56 Firms)
Lower labour costs
Increase inputs from/processing abroad
Increase investment and spending on
research and development
Other measures to improve productivity
and reduce costs
Raise selling prices
Reorient production
Change hedging behaviour
Other
Do Nothing
0 2 4 6 8 10 12 14 16 18 20 22 24
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Table 2
Change in Sectoral Activity from December 2002 to June 2005
(percentage change)
Share of total
GDP (2004
average)
Real GDP
change
Employment
change
Aggregate business
81.5
+ 7.5
+3.4
High exposure to international trade or
competition
Of which:
Mineral Fuels
Non-energy, non-farm commodity based
Other high-exposure sectors
19.1
+6.2
-3.1
2.3
7.0
9.8
+0.5
+3.2
+9.0
+19.6
+1.0
-4.8
Low exposure to international trade*
62.4
+7.9
+4.4
Sector
* Includes sectors that are exposed as net importers.
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Implications Policy
• One country, one monetary policy and one
floating currency
• Facilitating short-run adjustment, recognizing
transitional effects on capacity
• Type 1 versus type 2 fundamental forces acting
on the exchange rate
• Exchange rate movements, the output gap, and
inflation
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References
Amano, Robert and Simon van Norden (AvN). 1993, “A
Forecasting Equation for the Canada-U.S. Dollar Exchange
Rate.” The Exchange Rate and the Economy. Bank of
Canada.
Bailliu, Jeannine; Ali Dib and Lawrence Schembri (BDS). 2005.
“Multilateral Adjustment and the Canadian Dollar.” Presented
at the 2005 meetings of the Canadian Economics Association.
Helliwell, John; Ramzi Issa; Robert Lafrance and Qiao Zhang
(HILZ). 2004. “NEMO: An Equation for the Canadian Dollar.”
Presented at the 2005 meetings of the Canadian Economics
Association.
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