Sharp swings in the bank rate over the past couple of weeks - first down 29 basis points, then up 14 - have been the occasion for a lot of self-important second-guessing of the Bank of Canada.

The original move to lower rates was portrayed at the time as a long-overdue shift in course. The rising C$, after all, was destroying jobs, communities and ways of life. The Bank was at last loosening monetary policy, as numberless journalists informed their readers, in a switch ''from fighting inflation to preventing a recession.''

When the C$ leapt off a cliff in response, falling almost US3 cents, the same crew was back to tell us what a colossal blunder the Bank had made. It was a debacle, said one, a flip-flop, said another. This falling C$ was destroying jobs, communities and ways of life. Plus it would fuel inflation. The moral of the story, it would appear, is that the only proper rate of exchange for the C$ is exactly wherever it happens to be.

In truth, the whole episode, far from the unambiguous catastrophe depicted, has had several useful results. In previous weeks, the C$ had become something of a one-way bet, leading to a speculative bubble. The Bank has reminded speculators of the brokers' old disclaimer that ''prices may rise or fall.''

DAMAGE OVERSTATED

Certainly we have learned that the Bank's critics were right in one sense. We can have a made-in-Canada interest rate. We just get a made-in-Frankfurt-and- Zurich currency crisis if we do. What's important about this is not the fall in the C$ itself, but rather the reasons foreigners might have for dumping their holdings on the market.

Since it cannot be said with any certainty where the C$ should be at any given time, there is no way to judge whether a rise or fall in the C$ is a good thing. Sudden movements are admittedly unsettling, though the damage from exchange-rate volatility, given the hedging instruments available in today's markets, is always overstated.

But the Bank is right, as a general rule, to have dropped the exchange-rate target it seemed to have adopted as a policy guide for a time in the mid-1980s. The Bank's sole policy objective should be to ensure domestic price stability. It cannot do that if it is also chasing exchange-rate butterflies.

Nor do movements in exchange rates themselves have any impact on inflation. Yes, import prices rise when the C$ falls, but so long as the level of aggregate demand is the same, that will be contained to a relative price shift: that is, other prices will adjust to keep the average price level constant.

Rather, it is inflation, or the prospect of it, that accounts for declines in the exchange rate. If Canada's costs rise faster than those of other nations, then the exchange rate must adjust to keep Canadian products competitive. And if investors fear their C$ assets will be devalued in this way, they will try to sell first, exacerbating the decline.

The cut in the bank rate of two weeks ago is likewise indicative of nothing. Even if there were a case for easing policy, which there isn't, the Bank doesn't have to ease policy to bring about a fall in interest rates. Nominal rates are made up of the real rate plus a premium to cover expected inflation. The real component will come down as and when there is a fall in the demand for credit, whether through deficit reduction or an economic slowdown. The inflation premium will narrow as investors are persuaded the threat of future inflation has subsided - which implies a tighter policy, not looser.

The significance of recent events is that foreign investors thought a quarter- point cut in rates might mean policy was easing. The governor's tough-guy image and hard money rhetoric may play well in the press but in the financial markets, nobody's fooled. Not with money supply already growing at 17%, and not with a national debt teetering on the verge of unmanageability. In other words, the high rates we are paying are in part the price of Bank of Canada Governor John Crow's lack of credibility. Three cents off the C$ in a matter of days tells us of the extent of investor unease.

So the critics are right in another sense, though one they never intended. Crow can cut interest rates, if he cuts down the uncertainty premium. That means picking a rate of expansion in the money supply consistent with zero inflation, advertising it widely and sticking to it.