Does the Canadian economy suffer from Dutch disease

2012
We argue that the failure to disentangle the evolution of the Canadian currencyfrom the U.S. currencyleads to potentially incorrect conclusions regarding the case of Dutch diseasein Canada. We propose a new approach that is aimed at extracting both currencycomponents and energy- and commodity-price components from observed exchange rates and prices. We first analyze the separate influence of commodity prices on the Canadian and the U.S. currencycomponents. We then estimate the separate impact of the two currencycomponents on the shares of manufacturing employment in Canada. We show that between 33 and 39 per cent of the manufacturing employment loss that was due to exchange rate developments between 2002 and 2007 is related to the Dutch diseasephenomenon. The remaining proportion of the employment loss can be ascribed to the weakness of the U.S.
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