Canada’s Experiment with a Floating Exchange rate During the 1950s and Its Fear of Appreciation Pierre L Siklos WLU  VERC

The Story line New evidence on the behavior or foreign exchange reserves leads to a re-assessment of policy conduct in the 1950s PART I: Coyne Affair PART II: The so-called ‘float’ of the 1950s

The Evolution of Exchange Rate Regimes Identifying Exchange Rate Regimes The Two Corners or Bi Polar Views Is it a ‘Fear of Floating’ or a ‘Fear of Depreciations’ or Appreciations  ER  Inflation  slower economic growth  crisis Fischer; Reinhart – Rogoff; Levy Yeyati – Sturzenegger; among others

Canada in the 1950s Longest track record with a Floating Exchange rate Monetary Policy Innovations Going against Bretton Woods…temporarily High degree of capital mobility

Capital Mobility in Canada

Canada in the 1950s Longest track record with a Floating Exchange rate Monetary Policy Innovations Going against Bretton Woods…temporarily High degree of capital mobility Bottom Line  The float was not a pure one

A Tumultuous Decade Ending of Peg against the US Dollar A Decision to ‘float’ the currency Adopting an interest rate instrument and an accompanying money market Korean War  2 Major US recessions Battle against inflation  loan conversion program Conflict between Governor and Government

New Evidence Archival evidence reveals Intervention Fear of Appreciation ‘depoliticizing the exchange rate’ Helleiner 2006 Previous good experiences with the float in Canada …But it would not last. Canada returns to BW by early 1960s

The Background The decision to float in 1950 was supposed to be ‘temporary’ …but there were differing views about how long the situation would last The original press release “Fluctuations in the basic rate will no doubt occur from time to time in accordance with changing conditions of supply and demand: After a short transitional period it is expected that reasonably stable conditions will develop in the exchange market.”

Nominal ER  Reserves

Key Features Negative relationship between ER and Reserves during the 1951  57 period Relative stability in levels and low volatility October the Minister of Finance DC Abbott authorizes intervention to bring the “premium” down to at least 3  In advising the Governor the Minister wrote: “…you must use your judgment as to the timing and extent of such sales” Abbott 1950

Intervention in the FOREX market Archives suggest it took place during 1951  57 Other factors take over after that “It seems desirable that any decision deliberately to influence the exchange rate should be based upon a determined and publicly announced policy by the Government …” Coyne 1961a vol 1 p 2 Wonnacott 1965 refers to the era as a “return to a pegged rate” but adds that “… the authorities engaged in only very limited exchange intervention” op cit p 233

Intervention

Related Literature Friedman 1953  was not the inspiration Was speculation stabilizing  BDS 2007  assume a pure float and intervention ineffective Based on highly selective literature review Contradicts a significant portion of research through the 1970s All based on official international reserves data

Evaluating ER Policy During 1951  57 Data Daily; weekly; quarterly Intervention data from BoC Archives Official reserves only at monthly frequency No Forward rate series can be constructed Stylized facts and Basic Relationships

Exchange Rates and Intervention

Intervention Summary Statistics Year(1) Number of Days (2) Intensity (3) Simultaneous Activity (.03) (.02) (.02) (.03) (.05) (.02) (.01)0

US Versus Canada

Exchange Market Pressure

Intervention and the ER Again

A Target Zone Approach  The Simplest Test

Asymmetric Intervention Independent Variables Coefficient(t-values)[p-value] Constant0.13(3.65)[.00] ee -3.50(-8.43)[.00] D MAX 0.18(0.68)[.50] D MIN -0.48(-1.87)[.06] Summary Statistics.053 F35.20 (.00) Observations1826

Alternative ‘Experiments’ and a Counterfactual Was the 1951  57 period like the Managed Float of say the 1980s ‘Pure Float’ of the 2000s ‘Pure Float of the 1958  62 period

Is it Only a Levels Story 

Time Series Tell the Tale Table 3 (1) Jan. 4, 1951 – Dec. 31, 1952 (2) Jan. 4, 1951 – Dec. 31, 1957 (3) Jan. 5, 1989 – Dec. 29, 1995 (4) Jan. 6, 2000 – Dec. 29, 2006 Mean Equation Constant (-3.52,.00) (-3.30,.00) (-1.78,.08)-0.01 (-0.58,.56) INT t (-2.54,.01) (-2.58,.01)0.034 (0.77,.44)N/A ER news (-3.94,.00)-- AR (1)0.16 (6.61,.00)0.16 (6.58,.00)0.02 (0.77,.44)0.01 (0.52, 0.60) AR (2)-0.06 (-2.40,.02)-0.05 (-2.34,.02)-0.04 (-1.48,.14)-0.03 (-1.06,.29) Variance Equation ARCH0.173 (15.94,.00)0.17 (16.09,.00)0.09 (7.05,.00)0.03 (5.16,.00) GARCH0.827 (76.21,.00)0.83 (76.05,.00)0.91 (71.73,.00)0.97 (187.71,.00) INT t (4.64,.00)0.001 (4.66,.00)0.01 (2.60,.01)N/A Summary Statistics F11.94 (.00)11.12 (.00)0.056 (.99)- Observations

Counterfactual Pure float Jan 1, 1958-Dec 29, 1961 Fear of Floating Jan 5, 1951-Dec 29, 1957 Mean equation Constant (-1.145,.25) AR(1)0.056 (1.819,.07)0.056 INT t N/A (-0.143,.89) Conditional Volatility Constant (-5.942,.00) (8.527,.00) (73.938,.00)0.957 INT t N/A0.067 (6.055,.00)

Conclusions A good deal of the 1950s in Canada was not a pure float There was a ‘fear of appreciations’ As a result both ER levels and volatility are affected There are still other factors to consider Overall conduct of monetary policy