1,738 Works

Information Flows and Aggregate Persistence

Oleksiy Kryvtsov
Models with imperfect information that generate persistent monetary nonneutrality predominantly rely on assumptions leading to substantial heterogeneity of information across price-setters. This paper develops a quantitative general equilibrium model in which the degree of heterogeneity of information is determined endogenously. In the model, firms use two technologies to acquire information: costly updating to full information and costless learning from publicly observed market signals. Price changes of firms that update information infrequently are synchronized with market...

Liquidity Transformation and Bank Capital Requirements

Hajime Tomura
This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking...

Central Bank Performance under Inflation Targeting

Marc-André Gosselin
The inflation targeting (IT) regime is 17 years old. With practice of IT now in more than 21 countries, there is enough evidence gathered to take stock of the IT experience. In this paper, we analyze the inflation record of IT central banks. We extend the work of Albagli and Schmidt-Hebbel (2004) by looking at a broad range of factors that can influence inflation target deviations and by identifying the empirical determinants of successful monetary...

Macroprudential Regulation and Systemic Capital Requirements

Céline Gauthier, Alfred Lehar & Moez Souissi
In the aftermath of the financial crisis, there is interest in reforming bank regulation such that capital requirements are more closely linked to a bank's contribution to the overall risk of the financial system. In our paper we compare alternative mechanisms for allocating the overall risk of a banking system to its member banks. Overall risk is estimated using a model that explicitly incorporates contagion externalities present in the financial system. We have access to...

Price Formation and Liquidity Provision in Short-Term Fixed Income Markets

Christopher D'Souza, Ingrid Lo & Stephen Sapp
Differences in market structures may affect the manner in which fundamental information is incorporated into prices. High levels of quote and trade transparency plus substantial quoting obligations in European government securities markets ensure that prices are informationally efficient. The relationship between price changes, order flow, relative depth and spreads across European and Canadian short-term government bond markets is examined via a reduced-form vector autoregression model. In European markets, dealers are able to quickly absorb private...

Estimating DSGE-Model-Consistent Trends for Use in Forecasting

Jean-Philippe Cayen, Marc-André Gosselin & Sharon Kozicki
The workhorse DSGE model used for monetary policy evaluation is designed to capture business cycle fluctuations in an optimization-based format. It is commonplace to log-linearize models and express them with variables in deviation-from-steady-state format. Structural parameters are either calibrated, or estimated using data pre-filtered to extract trends. Such procedures treat past and future trends as fully known by all economic agents or, at least, as independent of cyclical behaviour. With such a setup, in a...

Une approche éclectique d'estimation du PIB potentiel pour le Royaume-Uni

Charles St-Arnaud
The author describes results obtained by using a new methodology to estimate potential output for the United Kingdom. The estimation method, which follows Rennison (2003) and Gosselin and Lalonde (2002), shows that combining the use of a Hodrick-Prescott filter and a structural vector autoregression (SVAR) is optimal to estimating potential output. Using this method, the author estimates two components of U.K. potential output: the full-employment labour input and the trend rate of labour-productivity growth. This...

Broker Routing Decisions in Limit Order Markets

David A. Cimon
The primary focus of this paper is to study conflict of interest in the brokerage market. Brokers face a conflict of interest when the commissions they receive from investors differ from the costs imposed by different trading venues. I construct a model of limit order trading in which brokers serve as agents for investors who wish to access equity markets. I find that brokers preferentially route marketable orders to venues with lower liquidity demand fees,...

The Effect of Adjustment Costs and Organizational Change on Productivity in Canada: Evidence from Aggregate Data

Danny Leung
A basic neoclassical model of production is often used to assess the contribution of investment to output growth. In the model, investment raises the capital stock and output growth increases in proportion to the growth in capital. It has been argued, however, that computers, as a "general purpose technology," lead to process innovations and facilitate organizational coinvestments. Since there may be a learning period before firms realize the full potential of the new technology and...

Banks, Credit Market Frictions, and Business Cycles

Ali Dib
The author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator. He evaluates the role of the banking sector in the transmission and propagation of the real effects of aggregate shocks, and assesses the importance of financial shocks in U.S. business cycle fluctuations. The banking sector consists of two types of profitmaximizing banks that offer different banking services and transact in an interbank market....

Easing Restrictions on the Stripping and Reconstitution of Government of Canada Bonds

David Bolder & Serge Boisvert
The Department of Finance and the Bank of Canada, as its fiscal agent, work closely with financial market participants in the management of the federal government's debt program. From the government's perspective, maintaining a liquid well-functioning market in Government of Canada securities is a key factor in ensuring that debt-service costs are minimized. It is also of general benefit to other participants in the domestic fixed-income market, since Government of Canada securities are a key...

Adopting Price-Level Targeting under Imperfect Credibility in ToTEM

Gino Cateau, Oleksiy Kryvtsov, Malik Shukayev & Alexander Ueberfeldt
Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. As this probability decreases and imperfect credibility abates, inflation expectations in the economy become consistent with price-level targeting. The paper finds a large welfare gain when...

Multi-Product Pricing: Theory and Evidence from Large Retailers in Israel

Marco Bonomo, Oleksiy Kryvtsov, Sigal Ribon & Rodolfo Rigato
Standard theories of price adjustment are based on the problem of a single-product firm, and therefore they may not be well suited to analyze price dynamics in the economy with multiproduct firms.

Have Liquidity and Trading Activity in the Canadian Provincial Bond Market Deteriorated?

Chen Fan, Sermin Gungor, Guillaume Nolin & Jun Yang
In recent years, the liquidity in the secondary market for Canadian provincial bonds was a concern for many market participants. We find that a proxy for the bid-ask spread has deteriorated modestly since 2010. However, a proxy for price impact as well as measures of trade size, the number of trades and turnover have been stable or improved since 2010. This holds for bonds issued by different provinces and for bonds of different ages and...

Estimating and Comparing the Implied Cost of Equity for Canadian and U.S. Firms

Jonathan Witmer & Lorie Zorn
This paper estimates the implied cost of equity for Canadian and U.S. firms using a methodology based on the dividend discount model and utilizing firms' current stock price and analysts' forecasted earnings. We find that firm size and firm stock liquidity are negatively related to cost of equity, while greater firm financial leverage and greater dispersion in analysts' earnings forecasts are associated with a higher cost of equity. Moreover, longer-term sovereign bond yields also seem...

Labour Reallocation, Relative Prices and Productivity

Shutao Cao & Danny Leung
This paper documents the rate at which labour flows between industries and between firms within industries using the most recent data available. It examines the determinants of these flows and their relationship with the productivity growth. It is found that the dispersion of industry employment growth rates has been elevated since 2005, and that this increase is not likely to be related to the business cycle. It is also found that changes in real exchange...

Monetary Policy in Estimated Models of Small Open and Closed Economies

Ali Dib
The author develops and estimates a quantitative dynamic-optimizing model of a small open economy (SOE) with domestic and import price stickiness and capital-adjustment costs. A monetary policy rule allows the central bank to systematically manage the short-term nominal interest rate in response to deviations of inflation, output, and money growth from their steadystate levels. The structural parameters of the SOE model, as well as those of a sticky-price model for a closed economy (CE), are...

Testing for a Structural Break in the Volatility of Real GDP Growth in Canada

Alexandre Debs
This study tests for a structural break in the volatility of real GDP growth in Canada following the methodology of McConnell and Quiros (1998). A break is found in the first quarter of 1991. Based on disaggregated data, the tests indicate a break in the volatility of the rate of change of investment in residential structures and a break in the volatility of the rate of growth of personal expenditures on goods. Three possible explanations...

A Structural VAR Approach to the Intertemporal Model of the Current Account

Takashi Kano
The intertemporal current account approach predicts that the current account of a small open economy is independent of global shocks, and that responses of the current account to country-specific shocks depend on the persistence of the shocks. The author shows that these predictions impose cross-equation restrictions (CERS) on a structural vector autoregression (SVAR). To test the CERs, the author develops identification schemes of the SVAR that exploit the orthogonality of the world real interest rate...

Why Does Private Consumption Rise After a Government Spending Shock?

Hafedh Bouakez & Nooman Rebei
Recent empirical evidence suggests that private consumption is crowded-in by government spending. This outcome violates existing macroeconomic theory, according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption. In this paper, we develop a simple real business cycle model where preferences depend on private and public spending, and households are habit forming. The model is estimated by the minimum-distance and the maximum-likelihood methods using U.S. data. Estimation...

Common Trends and Common Cycles in Canadian Sectoral Output

Francisco Barillas & Christoph Schleicher
The authors examine evidence of long- and short-run co-movement in Canadian sectoral output data. Their framework builds on a vector-error-correction representation that allows them to test for and compute full-information maximum-likelihood estimates of models with codependent cycle restrictions. They find that the seven sectors under consideration contain five common trends and five codependent cycles and use their estimates to obtain a multivariate Beveridge-Nelson decomposition to isolate and compare the common components. A forecast error variance...

Do Low Interest Rates Sow the Seeds of Financial Crises?

Simona E. Cociuba, Malik Shukayev & Alexander Ueberfeldt
A view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries. We evaluate this view in a quantitative dynamic model in which interest rate policy affects risk taking by changing the amount of safe bonds that intermediaries use as collateral in the repo market. In this model with properly-priced collateral, lower than optimal interest rates reduce risk taking. We also...

Menu Costs, Relative Prices, and Inflation: Evidence for Canada

Robert A. Amano & R. Tiff Macklem
Authors' note: Subsequent to completing this Working Paper, we realized that the way we constructed the weighted relative prices, ri, as described on page 8, is not invariant to the rate of inflation and this introduces a bias in favour of the menu-cost hypothesis. Preliminary results with a correction to this problem reveal that it affects the quantitative results. We are currently revisiting our empirical analysis more completely to consider the quantitative and qualitative implications...

Bank Lending, Credit Shocks, and the Transmission of Canadian Monetary Policy

Joseph Atta-Mensah & Ali Dib
The authors use a dynamic general-equilibrium model to study the role financial frictions play as a transmission mechanism of Canadian monetary policy, and to evaluate the real effects of exogenous credit shocks. Financial frictions, which are modelled as spreads between deposit and loan interest rates, are assumed to depend on economic activity as well as on credit shocks. A general finding is that almost all of the real response to a monetary policy shock comes...

Are Distorted Beliefs Too Good to be True?

Miroslav Misina
In a recent attempt to account for the equity-premium puzzle within a representative-agent model, Cecchetti, Lam, and Mark (2000) relax the assumption of rational expectations and in its place use the assumption of distorted beliefs. The author shows that the explanatory power of the distorted beliefs model is due to an inconsistency in the model and that an attempt to remove this inconsistency removes the model's explanatory power. Using the theory of rational beliefs, the...

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