The Canadian Dollar, 1971-76: An Exploratory Investigation of Short Run Movements

This paper examines the movement of the Canadian dollar over the 1971-76 period. Although Canadian prices increased substantially more than U.S. prices over this period, there was no tendency for a systematic depreciation of the Canadian dollar. To explain this phenomenon requires the introduction of other factors into the exchange rate equation. Among the variables that proved significant are the Canadian terms of trade, measures of long-term borrowing, the relative cyclical position of Canada and the United States, and the market's errors in forecasting the current account balance. When used together with relative prices, these variables track the movement of the Canadian dollar very satisfactorily over the period.