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."