Canada & Australia: Both commodity exporters but different outcomes

In the comments to a recent post, James in London asked:

“Does Canada fit, or at least partly fit, the Russia described in Lars’ post today? 25% of exports are energy products (oil and LPG), and then a lot of the rest are raw or nearly raw materials.”

The chart below plots two important developed commodity exporting countries, Canada and Australia.

EPN_Canada Australia

I believe Australia provides a much better ‘fit’ to the EPN (in this case commodity price norm) than Canada.

Just take the last couple of years. While Australia has clearly tightened monetary policy, bringing NGDP back towards the trend, which it surpassed in 2005-08 when it pursued a ‘loose’ monetary policy; Canada´s exchange rate has moved in tandem with commodity prices, but from the behavior of NGDP we figure that monetary policy has been excessively tight.

So, although Canada has been following closely the EPN, this has not been enough to keep NGDP close (or moving) to trend. Maybe my ‘country specialists’ readers would like to weigh in.

Additional information: House Prices (HPI)

EPN_Canada Australia_1

One thought on “Canada & Australia: Both commodity exporters but different outcomes

  1. The Bank of Canada looks to me like it is willing to stay tight on the monetary policy front, and “sacrfice” NGDP in order to control something that is largely out of their control, HPI. The banks certainly feel that the focus of the Bank of Canada is on HPI above other things at the moment.

    This is spookily similar to the situation in Sweden at the moment, where the central bank is fixated on HPI and appears willing to sacrifice NGDP to do something about it. Again, though, HPI is largely out of its control and is instead due to serious supply shortages of new housing versus strong demographic growth. And in Sweden the sensible person opposing this view of the world, Svensson has now left the Central Bank.

    It will be an interesting experiment if both Canada and Sweden achieve their HPI “correction” or stability and then to see whether they contain it, given the cost in NGDP.

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