Lawrence L. Schembri - Latest

• April 20, 2005

  Conference Summary: Canada in the Global Economy

  Bank of Canada Review - Spring 2005 Lawrence L. Schembri

  The Bank of Canada's 2004 research conference examined the real and financial linkages between the Canadian economy and the economies in the rest of the world. Although Canada has profited enormously from its openness to international trade in goods, services, and financial assets, many of the most significant shocks to the Canadian economy in recent years have come from abroad. For these reasons, understanding the extent and nature of the external linkages, their implications for the Canadian economy, and the process by which the Canadian economy adjusts to external shocks is of critical importance both for monetary policy and for monitoring the financial system. This article describes the purpose of the conference—to deepen economists' understanding of these important issues—and provides highlights of the papers presented in each of the five sessions, as well as summaries of the keynote lecture and the discussion of the policy panel.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Balance of payments and components, Exchange rates, International topics
• November 19, 2002

  Purchasing-Power Parity: Definition, Measurement, and Interpretation

  Bank of Canada Review - Autumn 2002 Robert Lafrance, Lawrence L. Schembri

  This article examines the concept of purchasing-power parity (PPP) and its implications for the equilibrium value of the Canadian exchange rate. PPP has two main applications, as a theory of exchange rate determination and as a means to compare living standards across countries. Concerning exchange rate determination, PPP is mainly useful as a reminder that monetary policy has no long-run impact on the real exchange rate, since the exchange rate can deviate persistently from its PPP value in response to real shocks. To compare living standards across countries, PPP exchange rates constructed by comparing the prices of national consumption baskets are used to translate per capita national incomes into a common currency. These rates are useful because they offset differences in national price levels to obtain comparable measures of purchasing power, but they are not an accurate measure of the equilibrium value of the exchange rate. The authors conclude that the current deviation of the Canadian exchange rate from the PPP rate does not imply that the exchange rate is undervalued, but that this deviation reflects the impact of persistent real factors, in particular, lower commodity prices.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates
• May 18, 2002

  Foreign Takeovers and the Canadian Dollar: Evidence and Implications

  Bank of Canada Review - Spring 2002 Lawrence L. Schembri

  Since 1995, acquisitions of foreign firms by Canadian residents and acquisitions of Canadian firms by foreign residents have increased. Through most of this period, the dollar has depreciated, but the cumulative net balance of foreign direct investment acquisition flows has remained close to zero. The recent upward trend in bilateral acquisition flows is part of the globalization process as firms consolidate and rationalize their operations, and is not related to the value of the Canadian dollar. Standard models of international asset pricing imply that there should not be a relationship between the Canadian exchange rate and foreign takeovers of Canadian firms because an exchange rate movement does not give foreign buyers a systematic advantage over domestic buyers. Purchases of domestic firms by foreign residents are likely to be welfare-improving. Transactions between foreign and domestic residents are voluntary, and they imply that the foreign buyers expect to obtain higher profits from the firms' assets.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates
• November 15, 2001

  Conference Summary: Revisiting the Case for Flexible Exchange Rates

  Bank of Canada Review - Autumn 2001 Lawrence L. Schembri

  This article summarizes the proceedings of an international research conference hosted by the Bank of Canada in November 2000. The conference marked the fiftieth anniversary of Canada's adoption of a flexible exchange rate, and its title recognizes the seminal contribution of Professor Milton Friedman's article "The Case for Flexible Exchange Rates." His keynote address to the conference is also summarized in the article. The conference papers re-examine many of the arguments raised by Friedman using recent developments in economic theory and econometric techniques. They investigate the experience of a wide range of industrialized and emerging-market economies. The main findings are that a strong case can be made for flexible exchange rates in economies that are large commodity exporters and that have credible low-inflation monetary policies and relatively well-developed financial systems.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes, Exchange rates
• December 15, 1999

  The Exchange Rate, Productivity, and the Standard of Living

  Bank of Canada Review - Winter 1999–2000 Robert Lafrance, Lawrence L. Schembri

  This article examines the recent proposition that the decline in Canada's standard of living relative to that of the United States is causally related to the decline in our exchange rate. The authors explore the main channels through which the exchange rate and the standard of living could be related—productivity and the terms of trade—focusing mainly on productivity. They conclude that the decline in world commodity prices and weak demand for domestic output were affecting both Canada's standard of living and the exchange rate and that the flexible exchange rate regime itself did not play an independent role.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates

• Real Effects of Collapsing Exchange Rate Regimes: An Application to Mexico

  Staff Working Paper 1999-10 Patrick Osakwe, Lawrence L. Schembri

  This paper examines the impact of a collapsing exchange rate regime on output in an open economy in which shocks to capital flows and exports predominate. A sticky-price rational expectations model is used to compare the variability of output under the collapsing regime to that under alternative fixed and flexible regimes. Output is found to […]

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates JEL Code(s): F, F3, F31, F4, F41
• November 13, 1998

  Currency crises and fixed exchange rates in the 1990s: A review

  Bank of Canada Review - Autumn 1998 Patrick Osakwe, Lawrence L. Schembri

  Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates