1. An Anatomy of Governor Stephen Poloz’s Speeches for Canadian International Finance J.D. Han King’s University College at Western University January 10, 2016

2. Key Points and their Analysis

3. Listening to him speaking: http://www.bnn.ca/News/2016/1/7/Canadians-should-get-used-to- lower-dollar-higher-inflation-Poloz-says.aspx http://www.bnn.ca/News/2016/1/7/Canadians-should-get-used-to- lower-dollar-higher-inflation-Poloz-says.aspx http://www.theglobeandmail.com/report-on- business/economy/canadians-should-get-used-to-lower-dollar-higher http://www.theglobeandmail.com/report-on- business/economy/canadians-should-get-used-to-lower-dollar-higher

4. Worsening Canadian ‘Terms of Trade’ “terms of trade” is the ratio of the prices a country receives for its exports to the prices it pays for its imports. A falling terms of trade, on the other hand, means less export revenues and more import payment, and thus less net income for the country overall.

5. Weakness of Exports, and Canadian Dollars “Canada’s economy is directly affected by what is happening in China, where a weaker appetite for resources is depressing prices for oil, coal, copper and many of the key commodities that dominate this country’s exports and investments.”

6. What else is contributing a Weak Canadian dollar? Recall the theory below, and indicate what is changing for the Canadian case: Supply of FOREXDemand for FOREX Trade Balance Current Account XM Financial AccountCapital InflowsCapital Outflows Above-the-Line BP BalanceX+ KI – (M+KO)>0 BP Surplus X+KI – (M+KO) = BP Equilibrium X+KI – (M+KO) <0 BP Deficits Downward Pressures on FOREX rateUpward Pressures on FOREX rate Changes in Official FOREX Reserve Official Reserves Down Official Financial Inflows Official Reserves UP Official Financial Outflows Question: Use the table above and explain which factors contribute to the current depreciation of Canadian dollar. What government policies affect those factors?

7. Canadian Monetary Policy When U.S. interest rate is going up, Canadian interest rate is not going to be hiked up due to concern for _______ domestic investment and rapid falling exports. Poloz says that Canada may even go for negative interest rates. Impacts on our International Investment Inbound and Outbound? And the external value of Canadian dollars?

8. FOREX Rate has risen and will rise The external value of our Canadian dollar has fallen, and will keep falling. Poloz hopes that this may help boost the domestic ___________investment through _______ interest rates, and boost the international _____________ through the Marshall Lerner condition.

9. Impacts of a Falling Canadian Dollar Value on the Canadian Economy Short-run -Exports and Imports -Employment, National Income in the short-run -Price; Inflation Long-run Impacts -Exports and Imports -Industry Structure and Productivities -Employment and National Incomes

10. Short-run Impacts of a Falling Canadian Dollar Value on the X-M Marshall Lerner Condition A depreciation of the domestic currency (when FOREX rate or ‘e’ goes up) may improve NX(Trade Balance) if Elasticity of Export + (absolute value of) Elasticity of Imports > 1.

11. proof] X – M is in fact X – e M, where e is FOREX rate. Differentiating both side by e, we get dX/de – 1 – dM/de > 0 dX/de – dM/de > 1 Intuitively, when ‘e’ goes up by 1%, the left side is the benefits (X up and M down); the right side is the cost (import price goes up by 1).

12. Mr. Poloz says that in Canada, the Marshall Lerner condition is met unlike some other country(such as U.S.)

13. Bank of Canada let FOREX rate go as the Market dictates because a cheaper Canadian dollar or a higher FOREX rate in Canada helps boost Exports (quantity) and reduce Imports (quantity).

14. dX/de may take longer than dM/de-> ‘J Curve”

15. Increasing Payments for Imports may be the first thing to be felt. And “Pass-Through” Inflation Domestic inflation rate = F(domestic excess demand pressure)+ G(world inflation rate + FOREX appreciation)

16. Pass Through Read Jose Campa and Linda Goldburg, “Exchange Rate Pass-through into Import Prices”, RES (2005). http://www.mitpressjournals.org/doi/pdf/10.1162/003465305775098 189 http://www.mitpressjournals.org/doi/pdf/10.1162/003465305775098 189 1)What is the ratio of d% of Import Prices/ d% of FOREX rates for Canada for the short-term and the long-term respectively? 2)If the exchange rate changes by 35% in the Canadian economy, what will be the change in import prices in the short-run?

17. “The cost to the country’s economy is $50-billion a year or $1,500 per person.”

18. What will happen to X-M in the long-run? The price faced by the International Buyers, say Americans, of Canadian goods: ef Pf/Pd in short-run ef Pf /Pd in long-run.

19. Emprical works indicate that in the long-run, Exchange Rates and Trade Balance may not be consistently related. Andrew Rose, “Roles of FOREX rates…: Does ML condition work?”, JIE(1996) http://ac.els-cdn.com/002219969190024Z/1-s2.0- 002219969190024Z-main.pdf?_tid=59637cf2-b82f-11e5-91a1- 00000aab0f6c&acdnat=1452495100_b593fdeb5ab497420a3832e4001 5fbf1 Andrew Rose, “Is there a J-curve?”, JME(1989) http://www.sciencedirect.com/science/article/pii/0304393289900160

20. Then, where would the Long-term Growth come in the Canadian economy? A falling Canadian dollar value may be a ‘shot in the arm’. Usually, a shot in the arm hampers efforts for an arduous search for Long-term Change. How can a falling Canadian dollar with a low interest rate lead to a rebuilding of the Canadian economy? What did he say?