Long-term trend and short-run dynamics of the Canadian dollar: an error correction modelling approach

Using quarterly data for 1972-2000, the paper examines the long-term and short-term movements of the US-Canadian exchange rate. It is found that the standard purchasing power parity condition fails to explain movements of the Canadian dollar. The explanatory power of the model increases significantly when resource commodity prices are added to the equation. Short-term movements in the Canadian dollar are influenced by the interest rate differential between Canada and the USA.