Governor Dodge discusses how flexible exchange rates aid economic adjustments

A flexible exchange rate regime can help an economy adjust to shocks, and can be an important part of a market-based, liberalized trade and financial order, said Bank of Canada Governor David Dodge.

In a speech to the ACI – The Financial Markets Association, Governor Dodge explained that a flexible exchange rate has helped Canada a great deal in coping with economic shocks. Changes in relative prices are a signal to shift resources out of sectors with declining profitability and into sectors where profits are rising, said Governor Dodge. "Under a floating rate regime, movements in the currency help to smooth that process and to minimize the adjustments in other areas of the economy."

Canada's experience with a flexible exchange rate regime could be instructive for emerging-market economies that are working towards developing their own market-based, liberalized trade and financial system, said the Governor. But the exchange rate regime is only one part of a sound policy framework that should also include a commitment to low and stable inflation and a well-functioning domestic financial system, he added. Governments must also commit to behaving in a fiscally responsible manner and avoid running up debt that will tie the hands of future governments, said Governor Dodge.

A floating exchange rate isn't necessarily right for every economy, noted the Governor. "But for many – and indeed, for most large economies – a flexible exchange rate can bring important economic benefits."

Content Type(s): Press, Press Releases

Related Information

May 4, 2007

The Importance of Appropriate Exchange Rate Regimes

Remarks David Dodge ACI - The Financial Markets Association Montréal, Quebec
Why do I think that such an order is so important? Well, in part it's because history has helped to demonstrate its virtues. But it's also extremely important to bear in mind the context, that is, the world in which we live today. This is a world in which adjustment is perpetual, where change is driven by the development of new technologies, where sectors and nations continually attempt to secure some new advantage. And in this world, price signals from markets help us to understand what adjustments are needed.