make life interesting for central bankers, both types of movement may occur at the same time. interpreting currency movements is not a science ; it requires judgment. in canada, type one currency movements often relate to the health of the global economy, which in turn is reflected in the foreign demand for, and world prices of, the commodities we produce in this country. when global demand is strong, and world commodity prices rise, the value of the goods that canada exports increases, and this tends to cause the canadian dollar to appreciate. this appreciation provides an offsetting force, dampening foreign and domestic demand for canadianproduced goods and services. to the extent that this dampening effect offsets the initial direct increase in demand, there's no need for a policy response. aggregate demand and supply remain in balance, and inflation stays on target. a type two exchange rate movement is one that is not triggered by a change in aggregate demand for canadian goods and services. but, as you might expect, the currency movement itself affects the demand for canadian goods and services, by making them more, or less, competitive relative to goods and services produced elsewhere. other things being equal, this is a situation to which monetary policy needs to respond to keep aggregate demand and supply in balance, and inflation on target. type two exchange rate movements are more difficult to describe, both because they are best defined as anything that is not type one, and because the distinction is not always as clear in practice as it is in theory. one example of a type two exchange rate movement is the " portfolio shock " that can arise when there is a sudden reassessment of risk by global investors, often in response to an economic crisis somewhere in the world. when this happens, there is a so - called " flight to quality. " that is, investors move out of assets denominated in riskier currencies — typically those of highly indebted countries — and this can lead to a sharp depreciation of these currencies. to the extent that the depreciation reflects the pure portfolio effect that is due to " financial contagion, " and not the result of a fall in demand for the goods and services produced by the country, it is a type two depreciation. in the first half of the 1990s, when inflation targeting was still very new in canada, and our government debt was rising unsustainably, canada was more susceptible to this kind of exchange rate movement. another example of

tiff macklem : floating dollar, anchored inflation - the role of the exchange rate in canada ’ s monetary policy framework remarks by mr tiff macklem, deputy governor of the bank of canada, to the lunenburg board of trade, lunenburg, nova scotia, 8 june 2006. * * * the first thing i'd like to say is... happy birthday! and many, many more. two hundred and fifty - three years of hard work and civic pride have made lunenburg the beautiful and historically rich place it is today. i'm very pleased to be here with you on this occasion. i'm happy to have been invited by the board of trade to speak about the role of the exchange rate in canada's monetary policy framework. the canadian dollar is very much in the news these days. and so i want to put exchange rate movements into context, and nova scotia is a good place to do that. with a commercial history that goes back centuries, nova scotians have a long experience with trade and currencies. from the early 1700s, when they were alleged to possess, and i quote, " a canniness in trade that staggered even the scotch, " 1 to the energy and agri - food exports of today, nova scotians have always been outward - looking, engaged in trade, and thus interested in the value of currencies. over the next 20 minutes, i'd like to explain the role of the flexible exchange rate in our economy. i'll start by providing a useful backdrop — the bank of canada's monetary policy framework. next, i'll take a close look at the flexible exchange rate, and discuss how the bank considers currency movements in its monetary policy decisions. i'll then comment on the recent appreciation of the canadian dollar, and conclude by discussing the challenges that the rapid appreciation of our currency is posing. at the end of my remarks, there will be time for comments and questions. the monetary policy framework the ultimate goal of the bank of canada is to promote the economic and financial welfare of canadians. to achieve this goal, we need a clear, effective policy framework. the two key components of the bank's monetary policy framework are an " anchor, " the inflation target, and a " float, " the flexible exchange rate. living by the ocean, you know better than i that a good mooring is one that keeps a boat in place, yet allows some give