And by focusing on inflation control, both the Bank of Canada and the Federal Reserve are allowing changes in relative prices to send those clear signals that help the economy adjust to different circumstances. Of course, it is not easy for businesses competing in the global economy to adapt to sharp movements in exchange rates.
But movements in exchange rates encourage the kinds of adjustments that are necessary in response to economic shocks. In the absence of a floating exchange rate and with limited labour market mobility between Canada and the United States, the adjustment that would otherwise take place would be significantly more costly and more difficult.