We examine the relationship between firms’ performance and credit constraints affecting export market entry. The existing research assumes that variation in firms’ financial conditions identifies credit constraints. A critical assumption is that financial conditions do not affect real outcomes (performance, exporting, or investment). To relax this assumption, we focus on the direct effect of firms’ fundamentals and financial conditions on firms’ performance. This approach distinguishes between firms that choose not to export because it is...

We study the role of intermediaries (brokers) in the Canadian mortgage market. In this market, consumers can search for quotes in one of two ways: on their own or via a broker. We provide descriptive evidence that borrowers who transact through brokers are different from those who do not. Broker-clients finance larger loans, are more leveraged, and are less creditworthy. After controlling for observable borrower characteristics that might explain these facts, we estimate a model...

Using micro data from the U.S. Consumer Expenditure Survey and Current Population Survey, I document that government spending shocks affect individuals differently over the life cycle. Young households increase their consumption after an expansionary shock while prime-age households reduce it, regardless of their level of income or debt. Productivity and wages increase significantly for young workers. To rationalize these findings, I develop a parsimonious New Keynesian life-cycle model where young agents accumulate skills on the...

Many explanations for the decline in real interest rates over the last 30 years point to the role that population aging or rising income inequality plays in increasing the long-run aggregate demand for assets. Notwithstanding the importance of such factors, the starting point of this paper is to show that the major change driving household asset demand over this period is instead an increased desire—for a given age and income level—to hold assets. We begin...

This paper brings novel insights into group coordination and price dynamics in complex environments. We implement an overlapping-generation model in the lab where output dynamics are given by the well-known chaotic quadratic map. This model structure allows us to study previously unexplored parameter regions where perfect-foresight dynamics exhibit chaotic dynamics. This paper highlights three key findings. First, the price converges to the simplest equilibria, namely either the monetary steady state or the two-cycle in all...

We develop a dynamic model of decentralized finance (DeFi) lending that incorporates two/these key features: 1) borrowing and lending are decentralized, anonymous, overcollateralized and backed by the market value of crypto assets where contract terms are pre-specified and rigid; and 2) information friction exists between borrowers and lenders. We identify a price-liquidity feedback: the market outcome in any given period depends on agents’ expectations about lending activities in future periods, with higher price expectations leading...

This paper measures how both geographical and cultural proximity of bank branches affect household credit choice and pricing. We examine both types of proximity jointly to separately identify the importance of soft information versus alternative mechanisms. Using a detailed household-level database for Canada, we find that both geographical and cultural proximity increase consumer credit by reducing the cost of obtaining soft information. Furthermore, soft information obtained via the two types of proximity can be either...

We develop an experimental framework to investigate the quantity theory of money and the real effects of inflation in an economy where money serves as a medium of exchange. We test the classical view that inflation reduces output and welfare by taxing monetary exchange. Inflation is engineered by constant money growth. We conduct three treatments, where the newly issued money is used to finance government spending, lump-sum transfers, and proportional transfers, respectively. Experimental results largely...

We review the nascent but fast-growing literature on central bank digital currencies (CBDCs), focusing on their potential impacts on private banks. We evaluate these impacts in three areas of traditional banking: payments, lending, and liquidity and maturity transformation. For each area, we discuss the lessons learned and identify gaps in the research yet to be fully explored. We also take a broader look at CBDCs and highlight two promising directions for future research. One is...

This paper proposes a unique approach to simulate intraday transactions in the Canadian retail payments batch system. Such transactions are currently unobtainable. The simulation procedure, though demonstrated in the realm of payments systems, has tremendous potential for helping with data-deficient problems where only high-level aggregate information is available. The approach uses the concept of integer composition in combinatorics to break down the daily total value and volume (available) into individual data points (unavailable) throughout the...

In recent years, the rise in digital payment innovations such as contactless cards and Interac e-Transfer has spurred a discussion about the future of cash at the point of sale. The COVID19 pandemic has also contributed to this discussion: While consumers reported that some merchants started to refuse cash early in the pandemic, such reported refusals dropped as the pandemic progressed. The Bank of Canada’s most recent Merchant Acceptance Survey (MAS) took place in 2018,...

This paper studies, theoretically and empirically, the unintended consequences of mandatory retention rules in securitization. The Dodd-Frank Act and the EU Securitisation Regulation both impose a 5% mandatory retention requirement to motivate screening and monitoring. I first propose a novel model showing that while retention strengthens monitoring, it may also encourage banks to shift risk. I then provide empirical evidence supporting this unintended consequence: in the US data, banks shifted toward riskier portfolios after the...

Canadian firms’ expectations for high inflation may be influencing their price setting, supporting strong price growth and delays in the transmission of monetary policy. Using data from the Business Outlook Survey, we investigate the reasons behind widespread price growth seen in Canada in 2021 and early 2022.

The neutral rate of interest is an important concept and communication tool for central banks. We develop a small open economy model with overlapping generations to study the determinants of the neutral real rate of interest in a small open economy. The model captures domestic factors such as population aging, declining productivity, rising government debt and inequality. Foreign factors are captured by changes in the global neutral real rate. We use the model to evaluate...

Commodity markets are linked through international trade but are separated by heterogeneous regulations and input markets. We investigate theoretically and empirically how regional, as opposed to global, cost shocks pass through into global prices. Capacity constraints mitigate the output response to regional cost shocks in the short run. Once constraints bind, the pass-through of a cost increase is enhanced while for cost decreases it drops to zero. We study the market for ammonia, a commodity...

This paper provides the context, rationale and key considerations that informed the Bank of Canada’s decision to publish a summary of monetary policy deliberations. It includes an analysis of how other central banks disclose minutes and summaries of their monetary policy deliberations. Most other central banks surveyed publish some sort of summary of deliberations. The Bank of Canada’s existing communications already include aspects of these summaries. However, the Bank does not normally provide some information...

This paper uses a large historical dataset (1870–2016) for 16 industrial economies to show that during macroeconomic disasters (e.g., wars, pandemics, depressions) aggregate consumption and income are significantly less decoupled than during normal times. That is, during these times of turmoil, the consumer intertemporal budget constraint holds more strictly, implying a structural reduction in consumption smoothing. While we also observe this for the ongoing COVID-19 pandemic, this is not the case for more conventional post-war...

This paper explores whether different funding structures—including the source, instrument, currency, and counterparty location of funding—affected the extent of financial stress experienced in various countries and sectors during the Covid-19 spread in early 2020. We measure financial stress using a new dataset on changes in credit default swap spreads for sovereigns, banks, and corporates. Then we use country-sector and country-sector-time panels to assess if these different funding structures mitigated—or amplified—the impact of this risk-off shock....

We study an economy with a time-varying distribution of production to examine the role of debt in amplifying and propagating recessions. In our model, entrepreneurs use risky, long-term debt to finance capital. Liquid assets serve as collateral and transaction costs make debt illiquid. Debt payments increase the volatility of earnings relative to output, deterring entrepreneurs with insufficient collateral from financing efficient levels of capital. This results in a misallocation of resources. In a large recession,...

The rise in inflation in 2021–22 sparked a growing literature and debate over the causes of the surge as well as the near- and medium-term path for inflation. This review offers three key messages. First, the exceptional nature of shocks resulting from the COVID-19 pandemic and geopolitical events drove the surge in inflation and the initial underestimation by many central banks of the extent of inflationary pressures. Second, the pandemic may have accelerated structural changes...

Global climate change is increasing the frequency and severity of natural disasters. We use detailed consumer credit data to investigate the impact of the 2016 Fort McMurray wildfire, the costliest wildfire disaster in Canadian history, on consumers’ financial stress. We focus on the arrears of insured mortgages because of their important implications for financial institutions and insurers’ business risk and relevant management practices. Our findings suggest that wildfires have caused more mortgage arrears in severely...

We build a tractable New Keynesian model to study four types of monetary and fiscal policy. We find that quantitative easing (QE), lump-sum fiscal transfers, and government spending have the same effects on the aggregate economy when fiscal policy is fully tax financed. Compared with these three policies, conventional monetary policy is more inflationary for the same amount of stimulus. QE and transfers have redistribution consequences, whereas government spending and conventional monetary policy do not....