"Union-made" monetary policy

Surprise, surprise: the incoming Bank of Canada Governor disses currency pegging to the U.S dollar. Of course, such a union implies redundancy for the green governor, his job likely just ceremonial in a regime managed by the Federal Reserve. But really, for whom is the Bank of Canada looking out? Claims that we need a made in Canada monetary policy should be viewed sceptically if the vision of continental integration is to be realized. What Canada needs is currency stability, not a floating rate that encourages slack productivity and inefficient allocation of capital. A brave new central bank would embrace currency union and encourage policy initiatives to facilitate the move. Pegging the loonie to the dollar would be unpopular in some corners, but would allow our economy to move one step closer to proper integration with the United States. Protecting the fiefdom of the Bank of Canada is not the visionary leadership Canadians need.

Don't peg loonie to greenback, incoming Bank governor says
The Canadian Press
Wednesday, December 05, 2007
OTTAWA — Canada should resist the understandable appeal of pegging the loonie to the greenback or forming a currency union with the United States, the incoming governor of Bank of Canada said Wednesday at a Parliamentary hearing.
At an historic appearance by a governor-designate before the Commons finance committee, Mark Carney defended the Bank of Canada's management of monetary policy in the face of the recent surge — and just as sudden fall — of the loonie.
And while Mr. Carney said it was understandable that many would want exchange rate certainty to protect some industries, such as the manufacturing sector, he maintained that the cost would be too high.
“Although there is no target exchange rate for the Canadian dollar, the bank does care why the exchange rate is moving and what the potential impact will be on output and inflation,” Mr. Carney told the committee.
But it would be a mistake to peg the loonie to the greenback, he continued.
“It would mean that, de facto, Canada would adopt U.S. monetary policy, despite the reality that the structures of our economies are very different and, as a consequence, often require different types of adjustments in response to global developments.”
The Canadian dollar has been on a roller-coaster since it began it's steep climb in mid-August, peaking above $1.10 (U.S.) in mid-November, before beginning a steep decline to its current value of just over 98 cents.
The volatility has been difficult for Canadian manufacturers and exporters, Mr. Carney acknowledged, but he said the Bank of Canada should not interfere unless the repercussions are so severe as to seriously damage Canada's economic prospects.
The best action the bank can take, he said, was to keep inflation low, stable and predictable. He noted that Canada has experienced the second-longest expansion in its history beginning in 1991, when the bank and the government signed an agreement to set a 2 per cent inflation target.
“That's what we risk if we take our eye off the ball, and I assure you I will not take my eye off the ball,” Mr. Carney told the committee.
“Inflationary booms always end badly and they require Herculean efforts to put us back into the path we already have now.”
There had been suggestions before Mr. Carney's appearance — the first by a bank governor nominee — that he would face a respectful but pointed grilling from the MPs.
While the MPs cannot override the appointment that goes into effect on Feb. 1, they could at least dig into his past and delve into areas of potential philosophical differences between him and outgoing Governor David Dodge.
And some MPs tried, particularly Liberal Garth Turner, who repeatedly attempted to get Mr. Carney to admit he was behind the government's Halloween surprise last year to tax income trusts.
Aside from repeating the government's stated reasons for the decision, Mr. Carney would neither deny nor confirm he was the architect of the policy, saying his advice to Finance Minister Jim Flaherty is covered by cabinet privilege.
© Canadian Press