Quebec’s finance minister should not be happy about a falling exchange rate

I’ve recently been made to understand that the finance minister of Quebec desires a falling exchange rate for the benefit of the province. His logic is the same as for any currency depreciation: it favours exports. But in all fairness, he should be worried about a falling exchange rate.

The best thing to do when exchange rates are higher is to import production inputs to increase productivity where necessary. The documented surge in the use of imported inputs allowed prices to drop while maintaining competitivity (as a result of higher productivity per unit of labour). A reduction in the exchange rate might have the effect of inciting manufacturers to turn away from productivity-enhacing investments in order to rely solely on a cheaper dollar.

Given that Quebec has a well-documented productivity gap with the rest of Canada and with the United States,this is not something the minister of Finance of Quebec should desire, especially since productivity growth in manufacturing has been slower than elsewhere in Canada.  If we were in Ontario, I would understand why a finance minister would appreciate a lower exchange rate, but Quebec isn’t Ontario.

 

 

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