The Merits of a Floating Exchange Rate

The benefits of our floating dollar

Canada and many other open economies have been well served by a market-determined flexible exchange rate. The floating dollar has four main benefits.

Monetary policy independence

Open, trading economies like Canada’s are exposed to global economic storms. A flexible exchange rate gives us the flexibility to set our own course for monetary policy and inflation.

Adjustment to external shocks

Our dollar’s value is closely tied to the prices of oil and other commodities. And commodity prices are typically hit first in a shock, whether it is a global trade war or a recession in a key trading partner.

  • For example, many jobs were lost in energy-producing provinces during the oil price shock of 2014, but by allowing the dollar to drop in value along with the price of oil, many more jobs were created in manufacturing and other industries whose products were exported.
  • In fact, we estimate that 900,000 fewer jobs would have been created if the Bank had raised interest rates to support the dollar.

Policy clarity and effectiveness

Because monetary policy focuses exclusively on keeping prices low and stable, the role of the exchange rate has become clearer. It responds to external shocks, particularly commodity price movements.

Financial sector development

Canada’s flexible exchange rate has contributed to more choice in and better access to financial markets and institutions. This improvement in choice and access supports the free flow of capital and trade. It also ensures that interest rate decisions are transmitted throughout the economy more effectively.

News – Bank of Canada