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COSTS AND BENEFITS OF EXCHANGE RATE STABILITY: CANADA'S INTERWAR EXPERIENCE
Author(s) -
BORDO MICHAEL D.,
REDISH ANGELA
Publication year - 1988
Publication title -
contemporary economic policy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.454
H-Index - 49
eISSN - 1465-7287
pISSN - 1074-3529
DOI - 10.1111/j.1465-7287.1988.tb00288.x
Subject(s) - economics , exchange rate , monetary policy , government (linguistics) , deflation , monetary economics , fiscal policy , rational expectations , macroeconomics , international economics , keynesian economics , linguistics , philosophy
In January 1929, the Canadian government suspended gold exports and implemented a floating exchange rate regime that endured until the onset of World War II. In sharp contrast to the experience of other countries that left the gold standard, Canada's deflation and declining economic activity continued until 1933. This paper examines why the Canadian government chose to follow a restrictive monetary policy and how that policy affected the Canadian exchange rate. We show that the chosen policy was rational—given the government's assumptions and objectives—and that it was consistent with fiscal policy. In so doing, we argue that the government's commitment to monetary stability was credible. We show that one can explain the Canadian exchange rate's behavior by a simple expectations‐based model of exchange rate determination, given external events and the government's monetary policy.