1,677 Works

Assessing Global Potential Output Growth: October 2020

Xin Scott Chen, Ali Jaffery, Guillaume Nolin, Karim Salhab, Peter Shannon & Subrata Sarker
This paper presents updated estimates of potential output growth for the global economy through 2022. Global potential output growth is expected to decline sharply in the aftermath of the COVID-19 pandemic and recover partially by the end of the projection horizon of the October 2020 Monetary Policy Report.

Accounting for Real Exchange Rates Using Micro‐Data

Mario J. Crucini & Anthony Landry
The classical dichotomy predicts that all of the time-series variance in the aggregate real exchange rate is accounted for by non-traded goods in the consumer price index (CPI) basket because traded goods obey the Law of One Price. In stark contrast, Engel (1999) claimed the opposite: that traded goods accounted for all of the variance. Using micro-data and recognizing that final good prices include both the cost of the goods themselves and local, non-traded inputs...

Non-Bank Financial Intermediation in Canada: An Update

Guillaume Bédard-Pagé
Non-bank financing provides an important funding source for the economy and is a valuable alternative to traditional banking. It helps enhance the efficiency and resiliency of the financial system while giving customers more choices for their financial services. Unlike banking, it is not prudentially regulated.

The Role of Financial Speculation in Driving the Price of Crude Oil

Ron Alquist & Olivier Gervais
Over the past 10 years, financial firms have increased the size of their positions in the oil futures market. At the same time, oil prices have increased dramatically. The conjunction of these developments has led some observers to argue that financial speculation caused the run-up in oil prices. Yet several arguments cast doubt on the validity of this claim. First, although the stock of open futures contracts is many times larger than the flow of...

The Macroeconomic Implications of Changes in Bank Capital and Liquidity Requirements in Canada: Insights from the BoC-GEM-FIN

Carlos de Resende, Ali Dib & Nikita Perevalov
The authors use simulations within the BoC-GEM-FIN, the Bank of Canada's version of the Global Economy Model with financial frictions in both the demand and supply sides of the credit market, to investigate the macroeconomic implications of changing bank regulations on the Canadian economy. Specifically, they compute short- and long-run impacts on key macroeconomic and financial variables following increases in the minimum required capital and liquidity ratios. The results indicate that, while long-run effects on...

Swedish Riksbank Notes and Enskilda Bank Notes: Lessons for Digital Currencies

Ben Fung, Scott Hendry & Warren E. Weber
This paper examines the experience of Sweden with government notes and private bank notes to determine how well the Swedish experience corresponds to that of Canada and the United States. Sweden is important to study because it has had government notes in circulation for more than 350 years, and it had government notes before private bank notes. Several differences between the experience of Sweden and that of Canada and the U.S. emerge. (i) Swedish bank...

Bootstrapping Mean Squared Errors of Robust Small-Area Estimators: Application to the Method-of-Payments Data

Valéry Dongmo Jiongo & Pierre Nguimkeu
This paper proposes a new bootstrap procedure for mean squared errors of robust small-area estimators. We formally prove the asymptotic validity of the proposed bootstrap method and examine its finite sample performance through Monte Carlo simulations. The results show that our procedure performs well and outperforms existing ones. We also apply our procedure to the estimation of the total volume and value of cash, debit card and credit card transactions in Canada as well as...

Le pouvoir de prévision des indices PMI

Claudia Godbout & Jocelyn Jacob
The forecast of world economic growth plays a key role in the conduct of Canadian monetary policy. In this context, the authors study the usefulness of the monthly Purchasing Managers’ Indexes (PMIs) in predicting short-term real GDP growth in the euro area, Japan, the United Kingdom, and China, as well as in the world economy. The main advantage of the PMIs lies in the timeliness of their releases compared to that of quarterly national accounts...

Prospects for Global Current Account Rebalancing

Kimberley Beaton, Carlos de Resende, René Lalonde & Stephen Snudden
The authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis. More specifically, they use several shocks from the model to generate a simulated baseline scenario that mimics: (i) the initial, pre-crisis state of disequilibrium in global current account balances, and (ii) the effects...

Noisy Monetary Policy

Tatjana Dahlhaus & Luca Gambetti
We introduce limited information in monetary policy. Agents receive signals from the central bank revealing new information (“news") about the future evolution of the policy rate before changes in the rate actually take place. However, the signal is disturbed by noise. We employ a non-standard vector autoregression procedure to disentangle the economic and financial effects of news and noise in US monetary policy since the mid-1990s. Using survey- and market-based data on federal funds rate...

Uncovered Return Parity: Equity Returns and Currency Returns

Edouard Djeutem & Geoffrey Dunbar
We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate. URP implies that unilateral exchange rate equations are misspecified and that equity returns also affect exchange rates. Fama regressions provide evidence that URP is statistically preferred to uncovered interest rate parity (UIP) for nominal bilateral exchange rates between the US dollar and six countries (Australia, Canada, Japan, Norway, Switzerland and the UK) at the monthly frequency. An implication of URP...

Firm Dynamics and Multifactor Productivity: An Empirical Exploration

Pierre St-Amant & David Tessier
There are indications that business dynamism has declined in advanced economies. In particular, firm entry and exit rates have fallen, suggesting that the creative destruction process has lost some of its vitality. Meanwhile, productivity growth has slowed. Some believe that lower entry and exit rates partly explain the weaker productivity growth. However, the evidence supporting, or invalidating, this view is scarce. In the present paper, we use multi-horizon causality tests and dynamic simulations with Canadian...

Reconciling Jaimovich-Rebelo Preferences, Habit in Consumption and Labor Supply

Tom D. Holden, Paul Levine & Jonathan Swarbrick
This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady-state observed target for hours worked and (c) is consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply. We employ Jaimovich- Rebello preferences, and our results highlight a constraint on the preference parameter needed to target the steady-state Frisch elasticity. This...

What Drives Interbank Loans? Evidence from Canada

Narayan Bulusu & Pierre Guérin
We identify the drivers of unsecured and collateralized loan volumes, rates and haircuts in Canada using the Bayesian model averaging approach to deal with model uncertainty. Our results suggest that the key friction driving behaviour in this market is the collateral reallocation cost faced by borrowers. Borrowers therefore adjust unsecured lending inresponse to changes in short-term cash needs, and use repos to finance persistent liquidity demand. We also find that lenders set rates and haircuts...

Statistical Confidence Intervals for the Bank of Canada's Business Outlook Survey

Daniel de Munnik
While a number of central banks publish their own business conditions indicators that rely on non-random sampling, knowledge about their statistical accuracy has been limited. Recently, de Munnik, Dupuis, and Illing (2009) made some progress in this area for the Bank of Canada's Business Outlook Survey (BOS) by estimating the impact of the Bank's non-random sampling on the accuracy of the survey results. They found no evidence that the Bank's firm-selection process results in significantly...

The Carry Trade, Portfolio Diversification, and the Adjustment of the Japanese Yen

Corinne Luu
In this paper, the author considers whether fundamentals or other factors can explain the yen's ongoing weakness. In particular, the importance of capital outflows due to the carry trade and longer-term portfolio investment outflows, which may be delaying the adjustment of the yen, are investigated. A simple portfolio model is developed, composed of a speculative component and a minimum variance portfolio, to address the underlying motivation for capital outflows from Japan over the past ten...

Analyzing supply and demand for business loans using microdata from the Senior Loan Officer Survey

Dylan Hogg
Both supply and demand factors help determine the level of business lending in the economy, but most data show only their combined effect on prices and quantities. Using the Bank of Canada’s Senior Loan Officer Survey microdata on financial institutions’ lending conditions and demand, we separate supply from demand effects.

Behaviour in the Canadian large-value payment system: COVID-19 vs. the global financial crisis

Alexander Chaudhry, Anneke Kosse & Karen Sondergard
Unlike the 2008–09 global financial crisis, the onset of the COVID-19 crisis did not raise stress levels in Canada’s Large Value Transfer System. Swift changes to the Bank of Canada’s collateral policy and its large-scale asset purchase programs likely eased liquidity pressures in the system.

BoC–BoE Sovereign Default Database: What’s new in 2021?

David Beers, Elliot Jones, Zacharie Quiviger & John Fraser
The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default.

An Analysis of the Information Content of Alternative Credit Aggregates

Leslie Milton
This study evaluates the information content of 25 measures of credit with respect to three macroeconomic variables—nominal spending, real spending and prices. Initially, simple descriptive techniques are used to assess the contemporaneous and leading relationships between the credit aggregates and the three goal variables. Next, bivariate vector autoregression models are constructed by regressing each of […]

The Investment Supply Response of Traded-Goods Industries

Paul Boothe
In this paper, the author uses neoclassical investment equations to examine investment behaviour in four groups of Canadian industries: export-oriented, import-competing, two- way-trade, and low-trade.

Rising US LNG Exports and Global Natural Gas Price Convergence

Robert Ialenti
We assess how rising exports of US liquefied natural gas affect the convergence of natural gas prices worldwide. Our results may have implications for the development of future LNG export capacity in Canada.

International Interest Rate Linkages and Monetary Policy: A Canadian Perspective

John Murray & Ritha Khemani
This paper examines the implications of increased international capital mobility and asset substitutability for domestic monetary policy in a small open economy such as Canada. Alternative definitions of international financial market integration are presented and tested in the context of two popular macro models. In the main, results suggest that interest rate relationships in Canada […]

An Integrated Model of the Portfolio Behaviour of the Canadian Household Sector: 1968-1983

Stephen S. Poloz
An econometric model of the portfolio behaviour of the Canadian household sector is developed to study the linkages between demands for financial assets. The theoretical basis for the model is a version of the well-known Brainard-Tobin framework, which is extended to integrate the consumption-savings and portfolio-allocation decisions. This integration allows joint estimation of the real […]

Fiscal and Monetary Stabilization Policy at the Zero Lower Bound: Consequences of Limited Foresight

Yinxi Xie & Michael Woodford
"We consider the effectiveness of stabilization policy when the zero lower bound (ZLB) is a relevant constraint on conventional monetary policy by relaxing the assumption of rational expectations. In particular, we assume bounded rationality in terms of limited foresight—people can plan for only a finite distance into the future when they deductively reason about the economy's future evolution. We examine how the degree of foresight affects the outcomes of fiscal and monetary stabilization policy. We...

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