Thank you. It's a very important question. I recognize that you've done some of the important research on the issue.
The first time I came before this committee was in the fall, about two years ago, and we had a brief discussion of this issue at that time, but there's certainly nothing that we've seen through the intervening years, through the course of the crisis, that has lessened our view that Canada is well served by having the policy combination of a floating exchange rate and inflation targeting. If anything, that view has been reinforced.
Let me talk briefly about some of the advantages of a floating exchange rate. First, I think we have to recognize that there are going to be shocks on the real side of the economy--domestically, internationally, commodity prices, etc.--and our economy is going to have to adjust to those shocks in some way. The exchange rate acts first as a shock absorber that adjusts in real time quickly to those shocks, which helps our economy to move in the right direction. The alternative to those adjustments is wholesale adjustments of wages and prices that are much more painful and much more protracted than the adjustments, as you know, that can come from the exchange rate.
We saw that in the Asian crisis, the weakness that came from the Asian crisis. Our dollar moved during that in anticipation, as it turns out, of the weakness that ultimately was going to come in commodity prices, importantly, which helped our economy through it. The dollar has moved in the recent past in anticipation of commodities' strengths, in terms of trade strength and relative advantages, which again has helped our economy adjust.
With a fixed exchange rate you still need that adjustment, and you're going to get it in a more painful fashion. One sees that in regional effects in the United States and in Europe as a result of this crisis, where there are needs for real adjustment, but with a fixed exchange rate they are much more painful adjustments. One is better served having a flexible exchange rate or having effectively the same industrial composition, the same composition of the economy, across the countries in the common currency area.
The other thing we would emphasize is that the advantages of fixed exchange rates are largely micro-economic--the move to the fixed exchange rate, lower transaction costs, lower uncertainty, and in some cases lower borrowing costs and enhanced policy credibility. Well, the Government of Canada has--and it has just been reinforced by the U.S. dollar issue the government did within the past three months--one of the lowest borrowing rates in the world; it is one of the best credits in the world. We would be hard-pressed to improve our borrowing costs, as many European countries did, and from a policy credibility perspective I think we feel that both on the monetary and fiscal side we do have that.
So it's hard to see the upside. It's easy to see the downside.