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International Monetary Fund

This Selected Issues paper reviews empirical evidence on the main determinants of the real bilateral exchange rate between the Canadian and the U.S. dollars, with particular emphasis on the role played by cyclical and longer-term economic factors. The paper aims to identify the nature of the shocks that have contributed to the recent downward trend in the Canadian dollar. The analysis shows that fluctuations in the real bilateral exchange rate can be explained reasonably well by its long-term fundamentals. The paper also analyzes inflation and the natural rate of unemployment in Canada.


Intervention in the foreign exchange market has been, and continues to be, an important feature of the conduct of economic policy in the present system of widespread floating. Central banks may buy or sell foreign exchange for a number of reasons. They may “lean against the wind” of short-run fluctuations in exchange rates in order to promote “orderly market conditions,” or lean against the wind of longer-term movements in attempts to influence trendlike appreciations or depreciations. Alternatively, they may attempt to speed up adjustments by purchasing or selling foreign exchange when the domestic currency is depreciating or appreciating. Finally, they may buy or sell foreign assets for other reasons than to influence the exchange rate, such as to alter the domestic money supply or to finance government imports or exports. Whatever their intentions, the consequences of central banks’ actions for exchange rate movements will depend critically on what type of domestic asset constitutes the counterpart to the purchases or sales of foreign exchange and on the reactions of the private sector and foreign central banks to these purchases. The purpose of this paper is to review the current state of knowledge about the effectiveness of intervention policy from both theoretical and empirical perspectives. The issue on which attention is focused concerns the extent to which intervention in the foreign exchange market can be considered to be different from general monetary policy—in other words, on the question of whether central banks can use money supply control and intervention policies independently. The answer to this question obviously has important implications for national monetary authorities’ conduct of monetary policy and for the International Monetary Fund’s monitoring of the exchange rate policies of its members.

International Monetary Fund. Western Hemisphere Dept.

Significant progress has been made in Haiti to safeguard macroeconomic stability after the January 2010 earthquake. However, the pace of the reconstruction has been slow and the business environment remains unattractive. Further development and strengthening social safety nets are essential. The monetary policy stance is appropriate and continuing commitment to exchange rate flexibility is appreciated. Improving the business environment is important to raise productivity, enhance competitiveness, and achieve higher and more inclusive growth.

International Monetary Fund
This paper examines external adjustment in the U.S., Japan and Germany from the perspective of net foreign asset positions. It asks two questions: What are, in the long run, the determinants of net foreign asset equilibrium? and: What are, in the short run, the adjustment mechanisms sustaining that equilibrium? An analysis of postwar data produces two insights. First, using a cointegration approach, the existence of long-run net foreign asset equilibrium can be identified; in each of the G-3 countries, it is a function of demographic variables and public debt. Second, deviations from the long-run equilibrium give rise to disequilibrium feedback through domestic absorption and through other channels.
Mr. Thomas Helbling and Mr. Bart Turtelboom
This paper analyzes the recent behavior of real exchange rates, the trade balance and the net foreign asset position of the United States in an intertemporal optimizing model of the world economy that incorporates heterogeneity across countries and imperfect international capital and good markets. While the model successfully tracks the dynamics of trade balances and net foreign assets it generates too much consumption smoothing and excessively volatile relative prices. Resolving these inadequacies simultaneously is difficult as the elasticity of substitution between tradables and nontradables affects in opposite ways the degree of consumption smoothing and the volatility of relative prices.
Mr. Gian M Milesi-Ferretti and Mr. Philip R. Lane
The relationship between international payments and the real exchange rate—the “transfer problem”—is a classic question in international economics. We use new data on countries’ net external positions together with real exchange rate data to shed light on this question. We present a model yielding testable implications on the long-run co-movements of real exchange rates, external positions, relative GDP and terms of trade, and cross-country and time-series evidence on the subject. Countries with net external liabilities are found to have more depreciated real exchange rates, with the main channel of transmission working through the relative price of nontraded goods.
Mr. Niels-Jakob H Hansen and Signe Krogstrup
Koreas cross border capital flows have tended to respond negatively in global risk-off episodes, resulting in volatility in the foreign exchange market and occasional policy responses in the form of foreign exchange interventions. We study the relationship between Korean capital flows and global volatility up to 2018. The response of capital flows during risk-off episodes have become more muted over time, and occasional safe-haven type flows into Korean bond markets have helped counterbalance the tendency for portfolio investors to leave. We describe these changing patterns and relate them to shifts in Korea’s domestic investor base. We discuss whether they reflect a sustained shift in the sensitivity of Koreas capital flow pressures to global risk-off episodes, and implications for monetary and exchange rate policies.
Agustin Benetrix, Deepali Gautam, Luciana Juvenal, and Martin Schmitz
This paper provides a dataset on the currency composition of the international investment position for a group of 50 countries for the period 1990-2017. It improves available data based on estimates by incorporating actual data reported by statistical authorities and refining estimation methods. The paper illustrates current and new uses of these data, with particular focus on the evolution of currency exposures of cross-border positions.
Mr. Mark P. Taylor
This paper contains essays on sterilized intervention, on covered interest rate parity, and on chartist analysis in financial markets. Each essay contains a definition, brief survey of the empirical evidence and overall assessment of each topic.
International Monetary Fund
We document external investment positions among European Union countries at the start of the financial crisis through the creation of a new database comprising bilateral external financial asset and liabilities, excluding reserve assets and derivatives. While there are some gaps in the data, the overall coverage of reported bilateral net international investment positions (IIPs) appears satisfactory. The dataset provides a richer picture of financial linkages, enabling us to map the financing of Euro area imbalances. Creditor and debtor positions vis-à-vis the rest of the EU have tended to increase between 2000 and 2008, with capital flowing largely from wealthier to catching-up economies. This has in particular resulted in an increased interdependency among Euro Area economies.