Privacy in CBDC technologySriram Darbha & Rakesh Arora
Privacy is a key aspect of a potential central bank digital currency system. We outline different technical choices to enact various privacy models while complying with the appropriate regulations. We develop a framework to evaluate privacy models and list key risks and trade-offs in privacy design.
IMPACT: The Bank of Canada’s International Model for Projecting ActivityPatrick Blagrave, Claudia Godbout, Justin-Damien Guénette, René Lalonde & Nikita Perevalov
We present the structure and features of the International Model for Projecting Activity (IMPACT), a global semi-structural model used to conduct projections and policy analysis at the Bank of Canada. Major blocks of the model are developed based on the rational error correction framework of Kozicki and Tinsley (1999), which allows the model to strike a balance between theoretical structure and empirical performance. IMPACT divides the world economy into six regions: United States, the euro...
Predicting Payment Migration in CanadaAnneke Kosse, Zhentong Lu & Gabriel Xerri
Developments are underway to replace Canada’s two core payment systems with three new systems. We use a discrete choice model to predict migration patterns of end-users and financial institutions for future systems and discuss their policy implications.
Cyclicality of Schooling: New Evidence from Unobserved Components ModelsBarbara Sadaba, Sunčica Vujič & Sofia Maier
What is the time-varying impact of economic cycles on decisions to invest in human capital?
Canadian stock market since COVID‑19: Why a V-shaped price recovery?Jean-Sébastien Fontaine, Guillaume Ouellet Leblanc & Ryan Shotlander
Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts...
Strengthening Inflation Targeting: Review and Renewal Processes in Canada and Other Advanced JurisdictionsRobert Amano, Thomas J. Carter & Lawrence L. Schembri
A growing number of advanced economies with monetary policy frameworks that involve inflation targeting have adopted formal processes of review and renewal. These allow policy-makers and other stakeholders to assess the current framework’s performance to date, explore the merits of potential alternative frameworks and reach decisions about how best to enhance design and implementation. In this paper, we argue that well-governed review and renewal processes can contribute importantly to the success of a monetary policy...
Cash and COVID-19: The impact of the pandemic on demand for and use of cashHeng Chen, Walter Engert, Kim Huynh, Gradon Nicholls, Mitchell Nicholson & Julia Zhu
Consumer spending declined significantly during the recent COVID-19 pandemic. This negative shock likely reduced spending across all methods of payment (cash, debit, credit, etc.). The mix of payment methods consumers use could also be affected. We study how the pandemic has influenced the demand for and use of cash. We also offer insights into the use of other payment methods, such as debit and credit cards.
Designing a CBDC for universal accessJohn Miedema, Cyrus Minwalla, Martine Warren & Dinesh Shah
If the Bank of Canada issues a central bank digital currency, the technology should be designed for universal access.
Announcing the Bankers’ Acceptance Purchase Facility: a COVID‑19 event studyRohan Arora, Sermin Gungor, Kaetlynd McRae & Jonathan Witmer
The Bank of Canada launched the Bankers’ Acceptance Purchase Facility (BAPF) to ensure that the bankers’ acceptance (BA) market could continue to function well during the financial crisis induced by the COVID‑19 pandemic. We review the impact that the announcement of this facility had on BA yields in the secondary market. We find that BA yield spreads declined by 15 basis points on the day of the announcement and by up to 70 basis points...
Will exchange-traded funds shape the future of bond dealing?Rohan Arora, Jean-Sébastien Fontaine, Corey Garriott & Guillaume Ouellet Leblanc
Bond dealers have traditionally kept bonds in an inventory until clients buy them. But now, dealers have another way to access bonds for their clients: the exchange-traded fund. We discuss this new way to manage bond dealing and what it might mean for bond markets.
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.
How Do Mortgage Rate Resets Affect Consumer Spending and Debt Repayment? Evidence from Canadian ConsumersKatya Kartashova & Xiaoqing Zhou
We study the causal effect of mortgage rate changes on consumer spending, debt repayment and defaults during an expansionary and a contractionary monetary policy episode in Canada. We find asymmetric responses of consumer durable spending, deleveraging and defaults. These findings help us to understand household sector response to interest rate changes.
Trading for BailoutsToni Ahnert, Caio Machado & Ana Elisa Pereira
"In times of high uncertainty, governments often implement interventions such as bailouts to financial institutions. To use public resources efficiently and to avoid major spillovers to the rest of the economy, policy-makers try to identify which institutions should receive assistance. One important source of information is activity in stock markets: high prices generally indicate expected high profits; low prices reflect expected poor performance. With this price information, policy-makers can infer the market’s perception of the...
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