Saturday, April 02, 2005

Dodging the issue - the failure of Canada's monetary regime

David Dodge, governor of the Canada’s central bank, spoke this week about issues pertaining to productivity levels and the importance of developing policies that improve education. Although Mr. Dodge has every duty to speak of productivity levels in relation to economic growth, he stepped too far into fiscal policy agenda with his direct suggestions pertaining to childcare. It is not the job of the central bank head to give such policy prescriptions – his domain should be strictly monetary policy. In fact, it is symptomatic that the root cause of our country’s chronic failures to keep up to the United States in labour productivity is the very monetary edifice Mr. Dodge heads. A country that depends on trade with America is ill served by the current floating exchange rate regime. Canadian productivity ailments are directly attributable to the effects of exchange rate depreciation.

Our export sector has been sweeping its failure to modernize under the carpet of a cheap Canadian dollar for a generation. Further, we have developed new export industries under the framework of a cheap dollar. This is the industrial strategy of a developing nation. It has served the economy with short-term gains at the cost – far greater cost – of poor capital allocation, research and development, education, and labour productivity. Exchange rate depreciation has also opened our export industries up to trade conflicts with our major market to the south. If the head of Canada’s monetary policy wants to improve productivity levels he need speak less of solutions beyond his purview and more of monetary policies that make exchange rate appreciation and par value a Bank of Canada objective. An even more progressive stance would be an open discussion of currency union with the United States. Of course, that may be too much to expect for a regime head to speak openly of its own demise.

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