The Operation of the Canadian Economy under Fixed and Flexible Exchange Rates: Simulation Results from the TRACE Model

The operation of the Canadian economy under fixed and flexible exchange rates: simulation results from the TRACE model. This paper investigates two 'old' ques- tions concerning the operation of fixed versus flexible exchange rates. Does the effectiveness of monetary and fiscal policy differ under a system of flexible exchange rates from that under a system of fixed exchange rates? Is the Cana- dian economy more insulated from economic shocks in the rest of the world under a flexible exchange rate system than under a fixed exchange rate system? To investigate these questions simulation experiments are performed on TRACE Mark IIIR, an econometric model of the Canadian economy which was designed to operate both under a system of fixed exchange rates and a system of flexible exchange rates. L'economie canadienne et les regimes de taux de change fixe et flexible: resul- tats de simulation avec le modele TRACE. Les auteurs s'interessent ici a deux questions debattues depuis longtemps et reliees a l'alternative: taux de change fixe ou flexible. L'efficacite des politiques monetaire et fiscale varie-t-elle selon le regime? L'economie canadienne est-elle mieux protege6e des chocs de l'exte- rieur dans l'un ou l'autre regime? Pour l'examen de ces questions, les auteurs ont procede a des simulations avec le modele econometrique TRACE Mark 11IR. Ce dernier permet une representation de l'economie canadienne soit en regime de taux de change fixe, soit en regime de taux de change flexible.