As I look at Canada’s exchange rate experience over the past few decades, however, one thing is very clear to me. And that is the importance of credible domestic macroeconomic policies. Without a sound fiscal policy and without a strong explicit commitment to inflation control, exchange markets will not have full confidence in the underlying value of the currency.
And the ability of a flexible exchange rate to respond to shocks and to facilitate the interest rate movements needed for an independent monetary policy will be seriously compromised. This in the end says it all. No exchange rate system is going to bail you out of bad economic policies.