Exchange rates

• October 3, 2006

  A New Effective Exchange Rate Index for the Canadian Dollar

  Bank of Canada Review - Autumn 2006 Janone Ong

  An effective exchange rate is a measure of the value of a country's currency vis-à-vis the currencies of its most important trading partners. The Bank of Canada has created a new Canadian-dollar effective exchange rate index (CERI) to replace the C-6 index that it currently uses. The CERI uses multilateral trade weights published by the International Monetary Fund and includes the six currencies of countries or economic zones with the largest share of Canada's international trade. As such, it better reflects the recent changes in Canada's trade profile, including the rise in the importance of China and Mexico and the relative decline in importance of Europe and Japan in Canada's international trade. The author describes the methodology and construction of the new index and reviews the advantages it offers over the C-6, particularly the use of multilateral trade weights, the inclusion of trade in services, and the use of more recent trade data.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial markets, Monetary and financial indicators

• Multinationals and Exchange Rate Pass-Through

  Staff Working Paper 2006-30 Alexandra Lai, Oana Secrieru

  The authors examine the impact of multinational enterprises (MNEs) on exchange rate pass-through in an environment where an MNE engages in Cournot (quantity) competition with domestic and foreign rivals.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Exchange rates, Market structure and pricing JEL Code(s): F, F2, F23, L, L1, L16

• The Turning Black Tide: Energy Prices and the Canadian Dollar

  Staff Working Paper 2006-29 Ramzi Issa, Robert Lafrance, John Murray

  The authors revisit the relationship between energy prices and the Canadian dollar in the Amano and van Norden (1995) equation, which shows a negative relationship such that higher real energy prices lead to a depreciation of the Canadian dollar.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Exchange rates JEL Code(s): F, F3, F31

• Can Affine Term Structure Models Help Us Predict Exchange Rates?

  Staff Working Paper 2006-27 Antonio Diez de los Rios

  The author proposes an arbitrage-free model of the joint behaviour of interest and exchange rates whose exchange rate forecasts outperform those produced by a random-walk model, a vector autoregression on the forward premiums and the rate of depreciation, and the standard forward premium regression.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Exchange rates, Interest rates JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15
• June 16, 2006

  Global Imbalances—Just How Dangerous?

  Bank of Canada Review - Spring 2006 Bruce Little, Robert Lafrance

  The combination of rising current account surpluses in Asia and a growing current account deficit in the United States has raised concerns that the resulting imbalances pose a threat to the world economy, especially if they are reversed in a disorderly manner. Some experts believe that normal market forces will resolve these imbalances over time; others argue that policy-makers should facilitate the adjustment with policies that curb domestic demand in deficit countries and stimulate it in surplus countries. Little and Lafrance provide a guide to the major issues and controversies involved in the debate.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Balance of payments and components, Exchange rates, International topics

• The Welfare Implications of Inflation versus Price-Level Targeting in a Two-Sector, Small Open Economy

  Staff Working Paper 2006-12 Eva Ortega, Nooman Rebei

  The authors analyze the welfare implications of simple monetary policy rules in the context of an estimated model of a small open economy for Canada with traded and non-traded goods, and with sticky prices and wages.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Exchange rates, Inflation targets JEL Code(s): E, E3, E31, E32, E5, E52

• A Structural Error-Correction Model of Best Prices and Depths in the Foreign Exchange Limit Order Market

  Staff Working Paper 2006-8 Ingrid Lo, Stephen Sapp

  Traders using the electronic limit order book in the foreign exchange market can watch the posted price and depth of the best quotes change over the day.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Financial markets JEL Code(s): C, C3, D, D8, F, F3, F31