1,675 Works

How Important Are Liquidity Constraints for Canadian Households? Evidence from Micro-Data

Umar Faruqui & Samah Torchani
Using a unique micro-dataset containing real and financial information on Canadian households for 2000–07, the authors address two questions: (1) What is the proportion of households whose consumption displays excess sensitivity to income, and who are likely liquidity constrained? (2) Do house prices affect the ability of Canadian households to smooth their consumption? The authors find that, on average (over the 2000–07 period), about 23 per cent of households in Canada were constrained. Their results...

Why Is Cash (Still) So Entrenched? Insights from the Bank of Canada’s 2009 Methods-of-Payment Survey

Carlos Arango, Dylan Hogg & Alyssa Lee
The authors present key insights from the Bank of Canada’s 2009 Methods-of-Payment survey. In the survey, about 6,800 participants completed a questionnaire with detailed information regarding their personal finances, as well as their use and perceptions of different payment methods. In addition, about 3,500 participants completed a 3-day diary recording information on each transaction, including the value and the payment instrument chosen. One of the main findings from the diaries is that, even though debit...

Credit Conditions and Consumption, House Prices and Debt: What Makes Canada Different?

John Muellbauer, Pierre St-Amant & David Williams
There is widespread agreement that, in the United States, higher house prices raise consumption via collateral or possibly wealth effects. The presence of similar channels in Canada would have important implications for monetary policy transmission. We trace the impact of shifts in non-price household credit conditions through joint estimation of a system of error-correction equations for Canadian aggregate consumption, house prices and mortgage debt. We find strong evidence that, after controlling for income and household...

International Transmission of Credit Shocks in an Equilibrium Model with Production Heterogeneity

Yuko Imura & Julia K. Thomas
Many policy-makers and researchers view the recent financial and real economic crises across North America, Europe and beyond as a global phenomenon. Some have argued that this global recession has a common source: the U.S. financial crisis. This paper investigates the extent to which a credit shock in one country is transmitted to its trade partners. To this end, we develop a quantitative two-country dynamic stochastic general equilibrium model wherein intermediate-good producers face persistent idiosyncratic...

Euro Area Government Bonds—Integration and Fragmentation During the Sovereign Debt Crisis

Michael Ehrmann & Marcel Fratzscher
The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight...

The Optimal Level of the Inflation Target: A Selective Review of the Literature and Outstanding Issues

Oleksiy Kryvtsov & Rhys R. Mendes
Bank of Canada research done prior to the most recent renewal of the inflation-control agreement in 2011 concluded that the benefits associated with a target below 2 per cent were insufficient to justify the increased risk of being constrained by the zero lower bound (ZLB) on nominal interest rates. International experience and analysis since the 2011 renewal has reinforced the importance of the ZLB. Despite the deployment of unconventional monetary policy measures by many central...

April 2017 Annual Reassessment of Potential Output Growth in Canada

Andrew Agopsowicz, Bassirou Gueye, Natalia Kyui, Youngmin Park, Mohanad Salameh & Ben Tomlin
This note summarizes the Bank of Canada’s annual reassessment of potential output growth, conducted for the April 2017 Monetary Policy Report. Potential output growth is projected to increase from 1.3 per cent in 2017 to 1.6 per cent by 2020. The lower estimate for potential output growth in the near term (relative to the 2016 assessment) largely reflects distinctly weak business investment over 2015 and 2016, as well as reallocation costs associated with the adjustment...

Assessing Global Potential Output Growth: April 2018

Richard Beard, Anne-Katherine Cormier, Michael Francis, Katerina Gribbin, Justin-Damien Guénette, Christopher Hajzler, Kristina Hess, James Ketcheson, Kun Mo, Louis Poirier & Peter Selcuk
This note presents our estimates of potential output growth for the global economy through 2020. Overall, we expect global potential output growth to remain broadly stable over the projection horizon, averaging 3.3 per cent, although there is considerable uncertainty surrounding these estimates. There are offsetting dynamics across regions. Specifically, potential output growth is expected to increase in the United States, reflecting a slight rise in capital deepening. In emerging-market economies, potential growth is also projected...

Exchange Rate Fluctuations and Labour Market Adjustments in Canadian Manufacturing Industries

Gabriel Bruneau & Kevin Moran
We estimate the link between exchange rate fluctuations and the labour input of Canadian manufacturing industries. The analysis is based on a dynamic model of labour demand, and the econometric strategy employs a panel two-step approach for cointegrating regressions. Our data are drawn from a panel of 20 manufacturing industries from the KLEMS database and cover a long sample period that includes two full cycles of appreciation and depreciation of the Canadian dollar. Our results...

On the Welfare Cost of Rare Housing Disasters

Shaofeng Xu
This paper examines the welfare cost of rare housing disasters characterized by large drops in house prices. I construct an overlapping generations general equilibrium model with recursive preferences and housing disaster shocks. The likelihood and magnitude of housing disasters are inferred from historic housing market experiences in the OECD. The model shows that despite the rarity of housing disasters, Canadian households would willingly give up 5 percent of their non-housing consumption each year to eliminate...

Sheltered Income: Estimating Income Under-Reporting in Canada, 1998 and 2004

Geoffrey Dunbar & Chunling Fu
We use data from the Survey of Financial Security and the Survey of Household Spending to estimate the incidence and extent of income under-reporting in Canada in 1998 and 2004. We estimate that the proportion of households under-reporting income is roughly 35 to 50 per cent in both years. Our estimates also suggest that the amount of under-reported income rose by roughly 40 per cent between 1998 and 2004 and remained stable as a proportion...

Does Financial Integration Increase Welfare? Evidence from International Household-Level Data

Christian Friedrich
Despite a vast empirical literature that assesses the impact of financial integration on the economy, evidence of substantial welfare gains from consumption risk sharing remains elusive. While maintaining the usual cross-country perspective of the literature, this paper explicitly accounts for household heterogeneity and thus relaxes three restrictive assumptions that have featured prominently in the past. By making use of international household-level data and a subjective measure of financial well-being, the analysis takes into account idiosyncratic...

Motivations for Capital Controls and Their Effectiveness

Radhika Pandey, Ila Patnaik, Ajay Shah & Gurnain K. Pasricha
We assess the motivations for changing capital controls and their effectiveness in India, a country with extensive and long-standing controls. We focus on the controls on foreign borrowing that can, in principle, be motivated by macroprudential concerns. We construct a fine-grained data set on capital control actions on foreign borrowing in India. Using event study methodology, we assess the factors that influence these capital control actions, the main factor being the exchange rate. Capital controls...

The International Experience with Negative Policy Rates

Harriel Jackson
A key issue in the renewal of the inflation-control agreement is the question of the appropriate level of the inflation target. Many observers have raised concerns that with the reduction in the neutral rate, and the experience of the recent financial crisis, the effective lower bound (ELB) is more likely to be binding in the future if inflation targets remain at 2 per cent. This has led some to argue that the inflation target should...

Forward Guidance at the Effective Lower Bound: International Experience

Karyne B. Charbonneau & Lori Rennison
Forward guidance is one of the policy tools that a central bank can implement if it seeks to provide additional monetary stimulus when it is operating at the effective lower bound (ELB) on interest rates. It became more widely used during and after the global financial crisis. This paper reviews the international experience, based on the six central banks that have used forward guidance when operating at the ELB, in order to assess its effectiveness...

An Update - Canadian Non-Energy Exports: Past Performance and Future Prospects

Andre Binette, Daniel de Munnik & Julie Melanson
In light of the fact that Canada was continuing to lose market share in the United States, Binette, de Munnik and Gouin-Bonenfant (2014) studied 31 Canadian non-energy export (NEX) categories to assess their individual performance. From this list, about half were expected to lead the recovery in exports. Since that time, NEX growth has picked up: about 80 per cent of the 31 categories have grown in line with, or outperformed, their respective U.S. benchmarks....

Labour Force Participation: A Comparison of the United States and Canada

James Ketcheson, Natalia Kyui & Benoit Vincent
This note explores the drivers behind the recent increase in the US participation rate in the labour market and assesses the likelihood of a similar gain in Canada. The growth in the US participation rate has largely been due to a pickup in the participation of prime-age workers following a post-recession decline. The prime-age participation rate in Canada, however, did not experience a significant drop following the 2008–09 recession, suggesting that the scope for drawing...

Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence

Laurence Savoie-Chabot & Mikael Khan
In an open economy such as Canada’s, exchange rate movements can have a material impact on consumer prices. This is particularly important in the current context, with the significant depreciation of the Canadian dollar vis-a-vis the U.S. dollar since late 2012. This paper provides a broad overview of the various mechanisms by which exchange rate movements pass through to consumer prices and discusses the implications of exchange rate pass-through (ERPT) for the conduct of monetary...

What Explains the Recent Increase in Canadian Corporate Bond Spreads

Maxime Leboeuf & James Pinnington
The spread between the yield of a corporate bond and the yield of a similar Government of Canada bond reflects compensation for possible default by the issuing firm and compensation for additional risks beyond default. Using the approach proposed by Gilchrist and Zakrajšek (2012), we find that roughly two-thirds of the total 1.2-percentage-point increase in corporate bond spreads from July 2014 to September 2016—a period when oil prices were low—is due to higher compensation for...

Non-linéarité de la courbe de Phillips : un survol de la littérature

Renaud St-Cyr
The paper reviews evidence from the economic literature on the nature of the relationship between excess capacity and inflation, better known as the Phillips curve. In particular, we examine the linearity of this relationship. This is an important issue in the current economic context in which advanced economies are approaching or exceed their potential output. In fact, several theoretical frameworks in the literature support the existence of non-linearity in the Phillips curve. To that end,...

Central Bank Digital Currency: Motivations and Implications

Walter Engert & Ben S. C. Fung
The emergence of digital currencies such as Bitcoin and the underlying blockchain and distribution ledger technology have attracted significant attention. These developments have raised the possibility of considerable impacts on the financial system and perhaps the wider economy. This paper addresses the question of whether a central bank should issue digital currency that could be used by the general public. It begins by discussing the possible motivations for a central bank to issue a digital...

Rollover Risk, Liquidity and Macroprudential Regulation

Toni Ahnert
I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex ante and are subject to fire sales ex post. Precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the liquidity...

International House Price Cycles, Monetary Policy and Risk Premiums

Gregory Bauer
Using a panel logit framework, the paper provides an estimate of the likelihood of a house price correction in 18 OECD countries. The analysis shows that a simple measure of the degree of house price overvaluation contains a lot of information about subsequent price reversals. Corrections are typically triggered by a sharp tightening in the monetary policy interest rate relative to a baseline level in each country. Two different assessments of the current and future...

Leaning Within a Flexible Inflation-Targeting Framework: Review of Costs and Benefits

Denis Gorea, Oleksiy Kryvtsov & Tamon Takamura
This note examines the merits of monetary policy adjustments in response to financial stability concerns, taking into account changes in the state of knowledge since the renewal of the inflation-targeting agreement in 2011. A key financial system vulnerability in Canada is elevated household indebtedness: as more and more households are nearing their debt-capacity limits, the likelihood and severity of a large negative correction in housing markets are also increasing. Adjusting the path of policy rates...

On the Nexus of Monetary Policy and Financial Stability: Effectiveness of Macroprudential Tools in Building Resilience and Mitigating Financial Imbalances

H. Evren Damar & Miguel Molico
This paper reviews the Canadian and international evidence of the effectiveness of macroprudential policy measures in building resilience and mitigating financial imbalances. The analysis concludes that these measures have broadly achieved their goal of increasing the overall resilience of the financial system to the buildup of imbalances and increasing the financial system’s ability to withstand adverse shocks. However, evidence of their effectiveness in providing countercyclical stabilization by curbing credit growth (“leaning against the financial cycle”)...

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