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Some costs from the lower dollar were not anticipated or even imagined when devaluation began late in 2014. No one foresaw that lowering interest rates and the exchange rate (which reduced the price foreign investors paid for housing in Canada) would trigger the housing bubbles in Vancouver and Toronto. House prices in Vancouver took off suddenly and accelerated in Toronto after the Bank of Canada cut interest rates in January 2015, reinforced by an inflow of people moving to these cities after the attraction of moving to the oil-producing provinces disappeared. The impact of lower interest rates and the exchange rate on housing prices was not anticipated because it did not occur during the devaluations undertaken in the 1970s and 1990s. The evidence-based approach to policy-making is limited to what has happened in the past, while it downplays what could be different in the future.

Instead of higher exports, easier monetary policy mostly produced soaring house prices

The fact that exports will eventually pick up in response to the lower dollar misses the key point. The lower dollar was meant to be an immediate salve to the wounded Canadian economy in 2015 and 2016. Instead, growth floundered with the Bank of Canada regularly citing weak exports and business investment as the reason growth continued to disappoint in 2015 and 2016, the very sectors the lower dollar was meant to stimulate. Instead of higher exports, easier monetary policy mostly produced soaring house prices in Vancouver and Toronto in 2015 and 2016.

Economics does a disservice to itself and the public when it claims more precision than it possesses. The idea of trying to stabilize the economy is less than a century old and our knowledge of the macro-economy is embryonic, not encyclopaedic.

Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute.