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This Selected Issues paper reviews empirical evidence on the main determinants of the real bilateral exchange rate between the Canadian and the U.S. dollars, with particular emphasis on the role played by cyclical and longer-term economic factors. The paper aims to identify the nature of the shocks that have contributed to the recent downward trend in the Canadian dollar. The analysis shows that fluctuations in the real bilateral exchange rate can be explained reasonably well by its long-term fundamentals. The paper also analyzes inflation and the natural rate of unemployment in Canada.

Banks and Banking --- Foreign Exchange --- Macroeconomics --- Taxation --- Corporate Taxation --- Industries: Financial Services --- Business Taxes and Subsidies --- Personal Income, Wealth, and Their Distributions --- Taxation, Subsidies, and Revenue: General --- Personal Income and Other Nonbusiness Taxes and Subsidies --- Public finance & taxation --- Corporate & business tax --- Currency --- Foreign exchange --- Labour --- income economics --- Finance --- Corporate income tax --- Real exchange rates --- Personal income --- Personal income tax --- Marginal effective tax rate --- Taxes --- National accounts --- Financial services --- Corporations --- Income --- Income tax --- Financial services industry --- Canada