1,677 Works

ToTEM: The Bank of Canada's New Quarterly Projection Model

Stephen Murchison & Andrew Rennison
The authors provide a detailed technical description of the Terms-of-Trade Economic Model (ToTEM), which replaced the Quarterly Projection Model (QPM) in December 2005 as the Bank's principal projection and policy-analysis model for the Canadian economy. ToTEM is an open-economy, dynamic stochastic general-equilibrium model that contains producers of four distinct finished products: consumption goods and services, investment goods, government goods, and export goods. ToTEM also contains a commodity-producing sector. The behaviour of almost all key variables...

A Comparison of Twelve Macroeconomic Models of the Canadian Economy

Denise Côté, John Kuszczak, Jean-Paul Lam, Ying Liu & Pierre St-Amant
In this report, the authors examine and compare twelve private and public sector models of the Canadian economy with respect to their paradigm, structure, and dynamic properties. These open-economy models can be grouped into two economic paradigms. The first is the "conventional" paradigm (or Phillips curve paradigm) and the second is the "money matters" paradigm. Under the conventional paradigm, inflation is determined by price adjustments in response to inflation expectations and by factor disequilibrium in...

Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada

Pierre St-Amant & Simon van Norden
In this paper, we discuss some methodologies for estimating potential output and the output gap that have recently been studied at the Bank of Canada. The assumptions and econometric techniques used by the different methodologies are discussed in turn, and applications to Canadian data are presented. The use of the Hodrick-Prescott (HP) filter to measure the output gap has been justified on the basis that this filter extracts business-cycle frequencies from the data and that...

Inflation Targeting under Uncertainty

Gabriel Srour
This paper studies the implications of certain kinds of uncertainty for monetary policy. It first describes the optimum policy rule in a simple model of the transmission mechanism as in Ball and Svensson. It then examines how this rule ought to be modified when there is uncertainty about the parameters, about the time lags, or about the nature of shocks. The paper also discusses the case of a small open economy such as Canada's, with...

Excess Volatility and Speculative Bubbles in the Canadian Dollar: Real or Imagined?

John Murray, Simon van Norden & Robert Vigfusson
Greater intervention by the public sector is often proposed as a solution to the increased speculation and excessive price volatility thought to characterize today's competitive world financial system. However, before any ambitious policy responses can be contemplated, the question of whether asset prices are in fact subject to excess volatility needs to be answered. This paper tries to answer the question by using the Canadian dollar as a representative asset and testing for excess volatility...

Core Inflation

Seamus Hogan, Marianne Johnson & Thérèse Laflèche
The Bank of Canada uses core CPI inflation, the year-over-year rate of change of the consumer price index excluding food, energy, and the effects of changes in indirect taxes, as the operational guide for monetary policy. In this report we study the concept and measurement of core or underlying inflation more generally by examining several alternative measures of core inflation, from the viewpoint that core inflation is a tool for policy purposes, either as an...

Democratic Political Economy of Financial Regulation

Igor Livshits & Youngmin Park
"The imposition of adequate regulation on banks and other financial institutions is crucial to maintain the stability of the financial system and macroeconomy. This is because participants in financial markets often have incentives that are not aligned with what is good for society. Many have argued that insufficient prudential regulation contributed to the 2008 sub-prime mortgage crisis in the United States. However, there is less discussion on why the US government failed to regulate banks...

Selection of the Truncation Lag in Structural VARs (or VECMs) with Long-Run Restrictions

Alain DeSerres & Alain Guay
authors examine the issue of lag-length selection in the context of a structural vector autoregression (VAR) and a vector error-correction model with long-run restrictions. First, they show that imposing long-run restrictions implies, in general, a moving-average (MA) component in the stationary multivariate representation. Then they examine the sensitivity of estimates of the permanent and transitory components to the selection of the lag length required in a VAR system to approximate this MA component. In summary,...

Long-Run Demand for M1

Scott Hendry
The goal of this paper is to investigate and estimate long-run relationships among M1, prices, output and interest rates, with a view to determining if there is a stable relationship that can be interpreted as long-run money demand. The paper uses a maximum-likelihood multiple-equation cointegration technique, developed by Johansen, to fit a system of equations

Price Caps in Canadian Bond Borrowing Markets

Léanne Berger-Soucy, Jean-Sébastien Fontaine & Adrian Walton
Price controls, or caps, can lead to shortages, as 1970’s gasoline price controls illustrate. One million trades show that the market for borrowing bonds in Canada has an implicit price cap: traders are willing to pay no more than the overnight interest rate to borrow a bond. This suggests the probability of a shortage increases when interest rates are very low.

Switching Between Chartists and Fundamentalists: A Markov Regime-Switching Approach

Robert Vigfusson
Since the early 1980s, models based on economic fundamentals have been poor at explaining the movements in the exchange rate (Messe 1990). In response to this problem, Frankel and Froot (1988) developed a model that uses two approaches to forecast the exchange rate: the fundamentalist approach, which bases the forecast on economic fundamentals, and the chartist approach, which bases the forecast on the past behaviour of the exchange rate. This was an innovation, as only...

Should Central Banks Adjust Their Target Horizons in Response to House-Price Bubbles?

Meenakshi Basant Roi & Rhys R. Mendes
The authors investigate the implications of house-price bubbles for the optimal inflation-target horizon using a dynamic general-equilibrium model with credit frictions, house-price bubbles, and small open-economy features. They find that, given the distribution of shocks and inflation persistence over the past 25 years, the optimal target horizon for Canada tends to be at the lower end of the six- to eight-quarter range that has characterized the Bank of Canada's policy since the inception of the...

Financial Constraints and the Cash-Holding Behaviour of Canadian Firms

Darcey McVanel & Nikita Perevalov
The proportion of assets held by the average Canadian firm in the form of cash has increased steadily since the early 1990s, and is now roughly twice as large as in 1990. The literature has established that the cash-holding behaviour of firms is highly correlated with financial constraints and firm characteristics. The authors use a firm-level data set covering Canadian firms from 1980 to 2006 to understand which firm characteristics are associated with higher cash...

The Canadian Dollar and Commodity Prices: Has the Relationship Changed over Time?

Philipp Maier & Brian DePratto
The authors examine the impact of the recent run-up in energy and non-energy commodity prices on the Canadian dollar. Using the Bank of Canada's exchange rate equation, they find that the differences between the actual value of the Canadian exchange rate and the simulated values observed in 2007 are not historically large. Still, given that there is some evidence that the sensitivity of the standard exchange rate equation to changes in energy and non-energy commodities...

Tracking Canadian Trend Productivity: A Dynamic Factor Model with Markov Switching

Michael Dolega
The author attempts to track Canadian labour productivity over the past four decades using a multivariate dynamic factor model that, in addition to the labour productivity series, includes aggregate compensation and consumption information. Productivity is assumed to switch between two regimes (the high-growth state and the low-growth state) with different trend growth rates according to a first-order Markov process. The author finds that labour productivity in Canada fell from the high-growth to the low-growth state...

India and the Global Demand for Commodities: Is There an Elephant in the Room?

Michael Francis & Corinne Luu
After 10 years of impressive growth, India is now the fourth largest economy in the world. Yet, to date, India's impact on global commodity markets has been muted. The authors examine how India's domestic and trade policies have distorted and constrained its demand for commodities. They find that India's industrial policies have altered the expansion path of its economy, putting the service sector to the forefront and likely reducing India's demand for metals. Sector-specific policies,...

The Zero Bound on Nominal Interest Rates: Implications for the Optimal Monetary Policy in Canada

Claude Lavoie & Hope Pioro
The authors assess the performance of the Canadian economy under a variety of interest rate rules when the zero bound on nominal interest rates can bind. Their assessment is based on numerical simulations of a dynamic stochastic general-equilibrium model in a stochastic environment. Consistent with the literature, the authors find that the probability and consequences of the zero bound depend strongly on the targeted rate of inflation and that price-level targeting generally leads to better...

The Impact of Sovereign Wealth Funds on International Financial Stability

Tamara Gomes
Over the recent period, many emerging-market economies and commodity-exporting nations have experienced unprecedented growth and accumulated substantial amounts of foreign exchange reserves. The management of these foreign reserves has led to the emergence of important financial actors: sovereign wealth funds (SWFs). While SWFs have existed in one form or another since the 1950s, they have recently risen in prominence and been exposed to public scrutiny and debate. The author outlines their possible impact on international...

Unanticipated Defaults and Losses in Canada's Large-Value Payments System, Revisited

Devin Ball & Walter Engert
Recent work at the Bank of Canada studied the impact of default in Canada’s large-value payments system, and concluded that participants could readily manage their potential losses (McVanel 2005). In an extension of that work, the authors use a much larger set of daily payments data – with three times as many observations – to examine the simulated losses of private sector participants and the Bank from defaults in the payments system. They also gauge...

A Structural VAR Approach to Core Inflation in Canada

Sylvain Martel
The author constructs a measure of core inflation using a structural vector autoregression containing oil-price growth, output growth, and inflation. This "macro-founded" measure of inflation forecasts total inflation at least as well as other, atheoretical measures.

Network Analysis and Canada's Large Value Transfer System

Lana Embree & Tom Roberts
Analysis of the characteristics and structure of a network of financial institutions can provide insight into the complex relationships and interdependencies that exist in a payment, clearing, and settlement system (PCSS), and allow an intuitive understanding of the PCSS's efficiency, stability, and resiliency. The authors review the literature related to the PCSS network and describe the daily and intraday network structure of payment activity in the Large Value Transfer System (LVTS), which is an integral...

Liquidity Efficiency and Distribution in the LVTS: Non-Neutrality of System Changes under Network Asymmetry

Sean O'Connor, James Chapman & Kirby Millar
The authors consider the liquidity efficiency of Tranche 2 of the Large Value Transfer System (LVTS T2) by examining, through an empirical analysis, some plausible strategic reactions of individual participants to a systemwide shock to available liquidity in the system. The network structure of the LVTS T2 is found to be asymmetric in terms of the patterns of out-payment flows. It is composed of three subgroups, in which participants within a subgroup are more strongly...

Payment Habits During COVID-19: Evidence from High-Frequency Transaction Data

Tatjana Dahlhaus & Angelika Welte
We examine how consumers have adjusted their payment habits during the COVID-19 pandemic. They seem to perform fewer transactions, spend more in each transaction, use less cash at the point of sale and withdraw cash from ATMs linked to their financial institution more often than from other ATMs.

Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases

Xu Zhang
"Between December 2008 and December 2015, the Federal Open Market Committee (FOMC) of the Federal Reserve Bank (the Fed) resorted to two unconventional monetary policies, forward guidance and large-scale asset purchases (LSAP), to provide stimulus to the economy.    Although the two policies are usually announced together, they affect the yield curve and the macroeconomy through different channels. When the Fed provides forward guidance—that is, communicating to the public about the likely course of monetary policy in...

L'endettement du secteur privé au Canada: un examen macroéconomique

Jean-Francois Fillion
In this study, the author examines the hypothesis of private-sector debt overhang, which suggests that households and businesses may on occasion find themselves holding too much debt and so decide to reduce it by cutting back expenditures. His aim is to determine whether this hypothesis can help explain the weakness of credit growth and the sluggishness of the recent economic recovery in Canada.

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