The Effect of Mortgage Rate Resets on Debt: Evidence from TransUnion (Part I)Katya Kartashova
This note studies how decreases in mortgage rates affect the behaviour of borrowers in terms of spending on durable goods and repaying debt.
BoC–BoE Sovereign Default Database: Methodology, Assumptions and SourcesDavid Beers, Elliot Jones & John Walsh
Until recently, few efforts have been made to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada (BoC) developed a comprehensive database of sovereign defaults that is posted on its website and updated in partnership with the Bank of England (BoE).
The Market for Acquiring Card Payments from Small and Medium-Sized Canadian MerchantsAngelika Welte & Jozsef Molnar
This note uses industry data and a unique dataset of small and medium-sized merchants to provide insights into the acquirer-merchant market in Canada.
CBDC adoption and usage: some insights from field and laboratory experimentsJanet Hua Jiang
This note discusses insights from historical launches of new payment methods and related laboratory experiments on the potential adoption and use of a central bank digital currency in the Canadian context.
Survival Analysis of Bank Note Circulation: Fitness, Network Structure and Machine LearningDiego Rojas, Juan Estrada, Kim Huynh & David T. Jacho-Chávez
"The main objective of this research is to understand bank note distribution patterns. We do this in a novel way—by looking at bank notes through the lens of big data analytics. We use data from the Bank of Canada's Currency Information Management Strategy (IMS) to study the notes themselves. We perform an exploratory analysis of the networks spanned by the bank notes’ circulation across 10 regions in Canada. The analysis focuses on how long the...
Average is Good Enough: Average-inflation Targeting and the ELBRobert Amano, Stefano Gnocchi, Sylvain Leduc & Joel Wagner
The Great Recession and current pandemic have focused attention on the constraint on nominal interest rates from the effective lower bound. This has renewed interest in monetary policies that embed makeup strategies, such as price-level or average-inflation targeting. This paper examines the properties of average-inflation targeting in a two-agent New Keynesian (TANK) model in which a fraction of firms have adaptive expectations. We examine the optimal degree of history dependence under average-inflation targeting and find...
Security and convenience of a central bank digital currencyCharles M. Kahn & Francisco Rivadeneyra
An anonymous token-based central bank digital currency (CBDC) would pose certain security risks to users. These risks arise from how balances are aggregated, from their transactional use and from the competition between suppliers of aggregation solutions.
Canadian Financial Stress and Macroeconomic ConditionsThibaut Duprey
Severe disruptions in the financial markets, as observed during the 2008 global financial crisis or the COVID-19 pandemic, can impair the stability of the entire financial system and worsen macroeconomic downturns.
Liquidity Usage and Payment Delay Estimates of the New Canadian High Value Payments SystemFrancisco Rivadeneyra & Nellie Zhang
As part of modernizing its core payments infrastructure, Canada will replace the Large Value Transfer System (LVTS) with a new Real-Time Gross Settlement (RTGS) system called Lynx. An important question for policy-makers is how Lynx should be designed.
The Term Structures of Loss and Gain UncertaintyBruno Feunou, Ricardo Lopez Aliouchkin, Roméo Tedongap & Lai Xu
"We investigate the uncertainty around stock returns at different investment horizons. Since a return is either a loss or a gain, we categorize return uncertainty into these two components. Loss uncertainty is the uncertainty surrounding negative returns, and gain uncertainty is the uncertainty surrounding any future gain. Investment opportunities can be evaluated by looking at these components. Using data from a large panel of S&P 500 Index options with time to maturity ranging from 1...
A Financial Stability Analysis of Zombie Firms in CanadaTimothy Grieder & Juan Ortega
We measure the prevalence of zombie firms in Canada and assess how they could potentially affect the financial system.
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,...
Interest Rate Uncertainty as a Policy ToolFabio Ghironi & Galip Kemal Ozhan
We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI). We identify the trade-offs faced in navigating between external balance and price stability. The interest rate uncertainty policy discourages short-term inflows mainly through portfolio risk and precautionary saving channels. A markup channel generates net FDI inflows under imperfect exchange rate passthrough. We further...
CBDC and Monetary SovereigntyAntonio Diez de los Rios & Yu Zhu
In an increasingly digitalized world, issuers of private digital currency can weaken central banks’ ability to stabilize the economy. By continuing to make central bank money attractive as a payment instrument in a digital world, a central bank digital currency (CDBC) could help to maintain a country’s monetary sovereignty.
Contagion in Dealer NetworksJean-Sébastien Fontaine & Adrian Walton
Bond dealers form trading networks that connect investors who buy and sell. Following the release of economic data, these networks become larger to accommodate more trades. But there may be a trade-off. Large networks also suffer from contagion: in this case, a prevalence of investors experiencing delays receiving their bonds.
What COVID-19 revealed about the resilience of bond fundsGuillaume Ouellet Leblanc & Ryan Shotlander
The liquidity management strategies of fund managers, supported by policy measures, have helped bond funds limit the increase in redemptions caused by COVID 19. This avoided further deterioration in liquidity in bond markets. Nevertheless, these funds were left with lower cash buffers, which could make them more vulnerable to additional large redemptions.
A Portfolio-Balance Model of Inflation and Yield Curve DeterminationAntonio Diez de los Rios
We propose a portfolio-balance model of the yield curve in which inflation is determined through an interest rate rule that satisfies the Taylor principle. Because arbitrageurs care about their real wealth, they only absorb an increase in the supply of nominal bonds if they are compensated with an increase in their real rates of return. At the same time, because the Taylor principle implies that short-term nominal rates are adjusted more than one for one...
Technology Approach for a CBDCDinesh Shah, Rakesh Arora, Han Du, Sriram Darbha, John Miedema & Cyrus Minwalla
In this note, we highlight a range of technical options and considerations in designing a contingent system for a central bank digital currency (CBDC) in Canada and explore how these options achieve stated public policy goals.
Do Protectionist Trade Policies Integrate Domestic Markets? Evidence from the Canada-U.S. Softwood Lumber DisputeJinggang Guo & Craig Johnston
We consider the effects of protectionist trade policies on international and domestic market integration, using evidence from the long-standing softwood lumber trade dispute between Canada and the United States. The benefits of trade liberalization are widely acknowledged, including better home-to-foreign price transmission due to reduced tariffs and lower trade costs between countries. Yet in recent years we see efforts to protect specific domestic groups, including producers, through a revival of protectionist trade policies. Such policies...
Multilateral Development Bank Credit Rating Methodology: Overcoming the Challenges in Assessing Relative Credit Risk in Highly Rated Institutions Based on Public DataDavid Xiao Chen, Philippe Muller & Hawa Wagué
The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of counterparties. Traditionally, foreign exchange reserve managers and other investors have relied on credit rating agencies (CRAs) as the main source for credit assessments. The Financial Stability Board issued a set of principles in support of financial stability to reduce reliance on CRA ratings in standards, laws and regulations. To support efforts to end mechanistic reliance on CRA...
Why Do Central Banks Make Public Announcements of Open Market Operations?Narayan Bulusu
Central banks communicate the results of open market operations. This helps participants in financial markets more accurately estimate the prevailing demand and supply conditions in the market for overnight loans.
Interbank Asset-Liability Networks with Fire Sale ManagementZachary Feinstein & Grzegorz Halaj
"Raising liquidity when funding is stressed creates pressure on the financial market. Liquidating large quantities of assets depresses their prices and may amplify funding shocks. How do banks weathering a funding crisis contribute to contagion risk? We propose a model to study the transmission of distress in a banking system that has been hit by a funding shock. The model captures (1) the indirect effects of price impacts due to the optimal reinvestment of banks’ asset mixture...
Trading on Long-term InformationCorey Garriott & Ryan Riordan
"Investors who trade based on good research are said to be the backbone of stock markets: They conduct research to discover the value of stocks and, through their trading, guide financial prices to reflect true value. What can make their job difficult is that high-speed, short-term traders could use machine learning and other technologies to infer when informed investors are trading. These short-term traders can then buy when informed investors are buying or sell when...
Characterizing Breadth in Canadian Economic ActivityTaylor Webley, Carla Valerio & Maureen MacIsaac
Real growth in gross domestic product tends to be meaningfully higher when a large share of industries and demand components are growing—that is, when growth is broad across many fronts.
Is the stock market pricing in a V‑shaped recovery?James Kyeong
Major stock indexes have bounced back from their March 23 trough to about 10 percent below their peaks. However, stocks that are more sensitive to the business cycle have not performed as well during this market rally. This suggests that stock markets are pricing in a slower, shallower economic recovery.