Appendix I. Data Resources
A1. Time-Series Data (annual, quarterly, and monthly)
Real effective exchange rate (REER) based on CPI, computed by the IMF.
Commodity price index: the energy price index and metals price index are from the Bank of Canada, with weights for price index from Canadian trade data. We deflate the commodity price index by U.S. GDP deflator for the quarterly data and with U.S. CPI for the monthly data, to get the real commodity price index.
The Canada-US 3-month interest rate spread is based on the difference between the 3-month Canadian Prime Corporate Paper and the U.S. 3-month nonfinancial commercial paper (both from Haver Analytics).
The Canada-US labor productivity differential is measured by GDP per person employed in 2011 EKS dollar, computed by the Conference Board.
Canada domestic demand is based on national accounts data (Source: Haver Analytics).
A2. Panel Data (annual)
For the panel data regressions, we define the manufacturing sector to be SITC6 plus SITC7 plus SITC8, that is, manufactured goods and machinery & transport equipment. The non-energy sector is computed by excluding SITC3 from the SITC sectors.
SITC (=Standard International Trade Classification) data from Comtrade (United Nations), which are complied and documented in Feenstra et al. (2005).
SITC0 = food and live animals.
SITC1 = beverages and tobacco.
SITC2 = crude materials and inedible except fuels.
SITC3 = mineral fuels, lubricants and related materials.
SITC4 = animal and vegetable oils, fats and waxes.
SITC5 = chemicals and related products.
SITC6 = manufactured goods.
SITC7 = machinery and transport equipment.
SITC8 = miscellaneous manufactured articles.
SITC9 = commodities and transactions not classified elsewhere in the SITC.
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Baldwin, John, and Wulong Gu (2009), “Productivity Performance in Canada, 1961 to 2008: An Update on Long-Term Trends”, Canada Productivity Review, Economic Analysis Division, Statistics Canada.
Bayoumi, Tamim, and Martin Muhleisen (2006), “Energy, the Exchange Rate, and the Economy: Macroeconomic Benefits of Canada’s Oil Sands Production”, IMF Working Paper, WP/06/70, International Monetary Fund.
Beine, Michel, Charles S. Bos, and Serge Coulombe (2009), “Does the Canadian Economy suffer from Dutch Disease?”, Tinbergen Institute Discussion Paper, TI2009–096/4.
Carney, Mark (2012), “Dutch Disease”, Remarks by the Governor of the Bank of Canada, Spruce Meadows Round Table, Calgary Alberta, September 7.
Cashin, Paul, Luis Felipe Cespedes, and Ratna Sahay (2003), “Commodity Currencies and the Real Exchange”, Central Bank of Chile, working paper No. 236.
Issa, R., R. Lafrance, and J. Murray (2008), “The Turning Black Tide: Energy Prices and the Canadian Dollar”, Canadian Journal of Economics, 41(3): 737–759.
Lascelles, Eric (2012), “Shrugging Off Canada’s Competitiveness Shortfall”, Economic Compass: Global Perspectives for Investors, RBC Global Asset Management.
Medas, Paulo and Daria Zakharova (2009), “A Primer on Fiscal Analysis in Oil-Producing Countries”, IMF Working Paper, WP/09/56, International Monetary Fund
de Munnik, Daniel, Jocelyn Jacob, and Wesley Sze (2012), “The Evolution of Canada’s Global Export Market Share”, Bank of Canada Working Paper, No. 2012–31
Romalis, John (2005), “NAFTA’s and CUSFTA’s Impact on International Trade”, NBER Working Paper, 11059, National Bureau of Economic Research, January.
Shakeri, Mohammad, Richard S. Gray, and Jeremy Leonard (2012), “Dutch Disease or Failure to Compete? A Diagnosis of Canada’s Manufacturing Woes”, IRPP Study, No. 30, Institute for Research on Public Policy, May.
Prepared by Paulo Medas, based on forthcoming IMF Working Paper by Medas and Dai.
Higher commodity prices have a direct positive welfare impact as they mean a transfer of wealth from the rest of the world, and thus higher income for Canadians. In addition, the domestic non-commodity economy benefits from higher demand for services and products from the commodity sector.
Governor Carney’s speech on September 7, 2012.
In the paper we are focusing on non-renewable commodities that are tradable internationally, as such when we refer to commodities we focus on energy and metals.
In this section, manufacturing is broadly defined as including machinery and equipment, transportation, and other consumer goods (from Canada Statistics).
As a consequence, while machinery and transport equipment accounted for close to half of Canadian exports to the U.S. in 1999, by 2011 they represented just slightly more than ⅓.
By “negative”, we mean that a rise in energy prices leads to a depreciation of the Canadian dollar versus the U.S. dollar.
These results are not fully comparable with those found by the Bank of Canada and referred above as the Bank’s study looks at the bilateral rate with the U.S. dollar and at a wider set of commodity prices, including energy and non-energy (metals, forestry, fish, and agriculture) prices.
Given our interest is in the long-term relationship, Table 1 only shows the estimates for the cointegrated equation (we omitted the constant in the table).
Shakeri, Gray, and Leonard (2012) argue that for the post-2004 period, the exchange rate become more sensitive to commodity prices. They find that a 1 percent increase in energy prices would lead to an appreciation of 0.5 percent (and 0.7 percent for non-energy commodities).
Using higher frequency data, after controlling for market volatility (as measured by the VIX), does not change the main results (Table 1, columns VI and VII). Periods of high market volatility (as measured by the VIX index) may also be associated with large fluctuations in commodity prices, which potentially affect the estimates of the REER’s sensitivity to commodity prices.
CUFTA is a free-trade agreement (FTA) between Canada and the United States, entered in 1989. NAFTA, replaced CUFTA since 1994, is a free-trade agreement (FTA) among Canada, the United States, and Mexico.
The forthcoming Working paper discusses in more detail the regressions and robustness tests.
For example, the impact of China seems to be stronger in some areas of manufacturing; while on commodities, beverages, animal products we could not find statistically significant impact as there is limited competition from China.
Namely, the regressions captured the effect of changes in the REER (or relative prices), but do not capture the effect from a new entrant in the market that has a significant relatively lower price level (as China). By including China’s share we control for that effect.
We tested whether this result reflects Canada and China’s shares reacting to a common shock by introducing instrument variables for China’s share (the productivity lag between Canada and China and China productivity growth). In both cases, the estimated impact of China remains statistically significant and is even larger (columns VII and VIII)
The control variables tend to have the expected sign. The introduction of CUFTA/NAFTA had a statistically significant positive (although small) impact on Canada’s market share in most regressions. The domestic demand in Canada also tends to affect negatively exports to the US, possibly due to a substitution effect.
In the 1999–2007 period, the appreciation explained slightly more than 60 percent of the market share loss, while China explained slightly more than 40 percent. Other factors (like CUFTA/NAFTA) had a smaller positive impact, only marginally compensating for the appreciation and China emergence.