Exchange rates

• November 19, 2002

  Purchasing-Power Parity: Definition, Measurement, and Interpretation

  Bank of Canada Review - Autumn 2002 Robert Lafrance, Lawrence L. Schembri

  This article examines the concept of purchasing-power parity (PPP) and its implications for the equilibrium value of the Canadian exchange rate. PPP has two main applications, as a theory of exchange rate determination and as a means to compare living standards across countries. Concerning exchange rate determination, PPP is mainly useful as a reminder that monetary policy has no long-run impact on the real exchange rate, since the exchange rate can deviate persistently from its PPP value in response to real shocks. To compare living standards across countries, PPP exchange rates constructed by comparing the prices of national consumption baskets are used to translate per capita national incomes into a common currency. These rates are useful because they offset differences in national price levels to obtain comparable measures of purchasing power, but they are not an accurate measure of the equilibrium value of the exchange rate. The authors conclude that the current deviation of the Canadian exchange rate from the PPP rate does not imply that the exchange rate is undervalued, but that this deviation reflects the impact of persistent real factors, in particular, lower commodity prices.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates

• Supply Shocks and Real Exchange Rate Dynamics: Canadian Evidence

  Staff Working Paper 2002-31 Céline Gauthier, David Tessier

  In this paper, we study the impact of supply shocks on the Canadian real exchange rate. We specify a structural vector-error-correction model that links the real exchange rate to different fundamentals.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates JEL Code(s): C, C3, C32, F, F3, F31

• Nominal Rigidity, Desired Markup Variations, and Real Exchange Rate Persistence

  Staff Working Paper 2002-26 Hafedh Bouakez

  This paper develops and estimates a dynamic general-equilibrium sticky-price model that accounts for real exchange rate persistence.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Market structure and pricing, Monetary policy transmission JEL Code(s): F, F3, F31, F4, F41

• Does Exchange Rate Policy Matter for Growth?

  Staff Working Paper 2002-17 Jeannine Bailliu, Robert Lafrance, Jean-François Perrault

  Previous studies on whether the nature of the exchange rate regime influences a country's medium-term growth performance have been based on a tripartite classification scheme that distinguishes between pegged, intermediate, and flexible exchange rate regimes.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rate regimes, Exchange rates, Monetary policy framework JEL Code(s): F, F3, F31, F33, F4, F43, O, O4, O40

• A Market Microstructure Analysis of Foreign Exchange Intervention in Canada

  Staff Working Paper 2002-16 Chris D'Souza

  This paper clarifies the role and the impact of foreign exchange dealers in the relationship between foreign exchange intervention and nominal exchange rates using a unique dataset that disaggregates trades by dealer and by type of trade.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Financial institutions, Financial markets JEL Code(s): F, F3, F31, G, G1, G14, G2, G21
• May 18, 2002

  Foreign Takeovers and the Canadian Dollar: Evidence and Implications

  Bank of Canada Review - Spring 2002 Lawrence L. Schembri

  Since 1995, acquisitions of foreign firms by Canadian residents and acquisitions of Canadian firms by foreign residents have increased. Through most of this period, the dollar has depreciated, but the cumulative net balance of foreign direct investment acquisition flows has remained close to zero. The recent upward trend in bilateral acquisition flows is part of the globalization process as firms consolidate and rationalize their operations, and is not related to the value of the Canadian dollar. Standard models of international asset pricing imply that there should not be a relationship between the Canadian exchange rate and foreign takeovers of Canadian firms because an exchange rate movement does not give foreign buyers a systematic advantage over domestic buyers. Purchases of domestic firms by foreign residents are likely to be welfare-improving. Transactions between foreign and domestic residents are voluntary, and they imply that the foreign buyers expect to obtain higher profits from the firms' assets.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates