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NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Working Papers by Lawrence Schembri

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Working Papers

November 2007Canada's Pioneering Experience with a Flexible Exchange Rate in the 1950s:(Hard) Lessons Learned for Monetary Policy in a Small Open Economy
with Michael D. Bordo, Ali Dib: w13605
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 ...

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