By James Langton
(March 9) – In a speech entitled, “The Conduct of Monetary Policy When You Live Next Door to a Large Neighbour”, Bank of Canada Governor Gordon Thiessen told the Canadian Society of New York about Canada’s attempts to maintain an independent monetary policy.
Thiessen devoted much of the speech to squashing any notion of a united North American currency in explaining the critical role of a floating exchange rate in allowing Canada to dea with economic shocks as it wants. He said that policy independence means “having the option and the ability to respond to fluctuations in demand that are unique to our economy.”
But he noted that the floating exchange rate is not an answer to policy dilemmas, just a good tool. “No exchange rate system is going to bail you out of bad economic policies,” he said. “And that is equally true of a floating exchange rate system as it is of the alternatives‹a fixed exchange rate system or indeed a monetary union, even if that monetary union is with
the world’s largest, strongest economy.”
Thiessen concluded that a flexible exchange rate continues to serve Canada well in dealing with the challenges of a changing, increasingly open world economy.
Thiessen took the opportunty to reiterat that Canada remains vigilant for signs of inflation. He pointed to stronger-than-anticipated demand both domestically and abroad and “uncertainty about the production potential of the economy.” The uncertainty is as putting the Bank on edge despite continued low inflation, he said. “Without that vigilance, we will be risking both the economic expansion and the potential productivity gains.”