“Is the falling exchange rate good news or bad news?”
I was on CBC radio yesterday morning for about 5 minutes, talking about the exchange rate.
From this experience, and from previous similar experiences, this is what reporters want to ask:
“Who gains, and who loses, from the fall in the exchange rate? For Canada as a whole, is the fall in the exchange rate good news or bad news?”
And the answer they expect to hear is:
“Exporters gain; importers lose. On the one hand it reduces unemployment; on the other hand it increases inflation.”
I don’t think reporters are alone in looking at it from that perspective. Most non-economists are probably the same. But economists are uncomfortable answering that question. Let me try to explain why:
The exchange rate didn’t just fall. Something, call it X, caused it to fall. So when we ask “Is the fall in the exchange rate good news or bad news?”, what are we really asking? You can’t give a good answer if you are unclear on the question.
We might be asking:
1. “Is X good news or bad news?”
Or, we might be asking:
2. “Given that X happened, should the Bank of Canada take action to prevent the fall in the exchange rate?”
To my mind, that second question is the useful one to ask. Because, even if we think we know what X is, and whether X is good news or bad news, if we can’t do anything about X, that isn’t very useful.
2a. An economist can say something useful about the benefits of two different monetary policies: would it be better for the Bank of Canada to fix the exchange rate, or should it target inflation and let the exchange rate adjust to wherever it needs to keep inflation on target?
2b. Or, an economist can say something useful about whether the Bank of Canada, in this particular case, needs to prevent the exchange rate falling in order to prevent inflation rising above the 2% target.
I decided to answer that second question, in the form 2a. I said it would be better for the Bank of Canada to target 2% inflation than to fix the exchange rate to the US Dollar.
I didn’t really answer 2b. But I think that, in this particular case, the Bank of Canada is right to let the Loonie depreciate, to help bring inflation back up to the 2% target.
My guess is that X is mostly news about Canadian inflation coming in lower than had previously been expected, and the realisation that the Bank of Canada would therefore not be raising interest rates as quickly as had previously been expected. (Note that when Statistics Canada released the December CPI data, on Friday morning, and inflation was just slightly higher than I had expected, the Loonie gained nearly half a cent in the next hour.) And maybe weaker commodity prices are part of X too. And maybe the US recovery, and the prospect of rising US interest rates, is part of X too.
Sometimes, when a reporter asks you a question, it’s best not to answer it, and to answer a different question. Not because you are weaseling out of answering the reporter’s question, but because you think about it differently, and you think the reporter’s question isn’t the right one to ask. (I now have more sympathy for politicians being interviewed, when they appear to duck an apparently straight question!)
Update: by the way, when reporters want to interview an economist, they (or one of the people they work with) will normally want to have a pre-interview discussion first. This is your chance to suggest they re-frame the question in the way you think it should be framed. You can tell them you wouldn’t be able to give a good answer to that question, but you could give a good answer to a different but related question. Because very few reporters have any economics background, they don’t really know what questions to ask. And, from my experience, they seem to be willing to listen to your suggestions, because they are trying to prepare for the interview, as well as help you prepare.
It would be interesting to hear any reporter’s thoughts on interviewing economists. (It must be tough!)
Posted by Nick Rowe on January 28, 2014