things. in other words, a flexible exchange rate is necessary for achieving monetary independence and influence over domestic monetary conditions. rey ( 2013 ) has recently argued that the trilemma is no longer appropriate because a global financial cycle drives capital flows, and these flows primarily determine domestic financial conditions, not domestic monetary policy. therefore, policy - makers face only a dilemma ( between free capital movement and independent monetary policy ), and countries would need capital controls to conduct independent monetary policy. however, shambaugh ( 2004 ) and obstfeld, ostry and qureshi ( 2019 ) show that exchange rate regimes do matter, even for emerging - market economies, when it comes to the transmission of global financial shocks. both studies find that flexible exchange rates provide greater monetary independence and are consistent with the trilemma. 10 more fundamentally, in a world of open capital markets, the mundell framework would imply that, while the impact on interest rates from monetary policy actions may be more muted, more of the transmission of monetary policy will take place through the exchange rate. simply put, flexible exchange rates still preserve some degree of monetary policy independence. in summary, for commodity exporters like canada, the need to chart a course for domestic monetary policy independent of that in the united states typically arises when there are large swings in commodity prices. because the united states is a net commodity importer, such movements have a large differential impact on the two countries, necessitating a different monetary policy, made possible by a flexible exchange rate, to maintain price stability. 11 facilitating adjustment 4 / 11 bis central bankers'speeches a flexible exchange rate helps attain price stability not only by allowing domestic monetary policy to focus on this goal but also by facilitating the domestic economy ’ s adjustment to external shocks. whether that shock is a global trade war or a recession in a key trading partner, commodity prices are typically hit first. they are the bellwether for global economic conditions because they are actively traded in global markets where new information is rapidly processed and embedded in their prices. chart 4 shows how commodity prices respond to global forces. for example, the entry of china into the world trade organization and into the global economy sparked a run - up in the demand for commodities and their prices from 2002 to 2007, while the opposite occurred during the great recession of 2008 – 09. in both cases, the exchange rate moved largely in tandem with the index of commodity prices. but how does our flexible exchange rate actually smooth economic adjustment to a commodity

would be affected by exchange rate movements and the volume of imports would adjust. 17 devereux, dong and tomlin ( 2017 ) find that, by value, 88 per cent of canadian imports were invoiced in us dollars over the period from september 2002 to june 2008. gopinath, itskhoki and rigobon ( 2010 ) find 96 per cent of canada ’ s exports to the united states over the 1994 – 2005 period were priced in us dollars. 18 in other words, the bank of canada ’ s reaction function to various shocks was not well understood. 19 the delineation of roles between monetary policy and the exchange rate corresponds to the concept of policy assignment of mundell ( 1961 ). 20 see champagne and sekkel ( 2018 ) for more details. 21 in both canada and australia, the correlation coefficients between the exchange rate and the commodity price index increased significantly after inflation targeting was put in place : from – 0. 73 to 0. 84 in canada, from 0. 51 to 0. 84 in australia and from 0. 35 to 0. 49 in chile. all of these correlation changes are statistically significant at the 1 per cent level. see cui ( forthcoming ) for further details. note part of the increased correlation in the canadian case reflects the increasing importance of oil exports over the sample. see issa, lafrance and murray ( 2008 ) for more details. 22 canadian government policy now restricts such interventions to the most exceptional circumstances. 23 dodge ( 2007 ) explains that maintaining a fixed exchange rate may require controls on both the financial and real sides of the economy. thus, a flexible exchange rate would preclude the need for such intervention. 24 see dunbar and li ( forthcoming ) for more details. they find that the benefits in terms of financial development are largest for early adopters of inflation targeting — for example, canada, australia and new zealand. the sample was of 30 countries that adopted inflation targeting between 1980 and 2016. 25 canada is perhaps the best example of the outcomes predicted by milton friedman ( 1953 ) in his well - known article, “ the case for flexible exchange rates. ” 26 dodge ( 2007 ) cogently argues that many countries should strive to achieve a well - functioning flexible exchange rate because it is a key component of a market - based liberalized trade and financial order that will promote global economic growth and prosperity. 11 / 11 bis central bankers'speeches