1,297 Works

A Dynamic Factor Model for Commodity Prices

Doga Bilgin & Reinhard Ellwanger
In this note, we present the Commodities Factor Model (CFM), a dynamic factor model for a large cross-section of energy and non-energy commodity prices. The model decomposes price changes in commodities into a common “global” component, a “block” component confined to subgroups of economically related commodities and an idiosyncratic price shock component. Unlike with ordinary factor models, these components have meaningful economic interpretations: the global component mostly relates to global commodity demand shocks, while the...

Do Canadian Broker-Dealers Act as Agents or Principals in Bond Trading?

Daniel Hyun, Jesse Johal & Corey Garriott
Technology, risk tolerance and regulation may influence dealers to reduce their trading as principals (using their own balance sheets for sales and purchases of securities) in favour of agency trading (matching client trades). A move toward agency trading would represent a change in the structure of Canadian bond markets and, in theory, could worsen some aspects of market liquidity. To assess the prevalence of agency trading in Canada, we use data from the Market Trade...

Using Exchange-Traded Funds to Measure Liquidity in the Canadian Corporate Bond Market

Rohan Arora, Guillaume Ouellet Leblanc, Jabir Sandhu & Jun Yang
We introduce a new proxy for measuring corporate bond liquidity, using the price of exchange-traded funds (ETFs) that hold corporate bonds. It measures the average liquidity across 900 corporate bonds every day, many more than other proxies used in previous Bank of Canada analysis. The new proxy nonetheless paints a very similar picture of liquidity conditions and confirms the previous findings: the liquidity of bonds has generally improved since 2010.

2018 Merchant Acceptance Survey

Kim Huynh, Gradon Nicholls & Mitchell Nicholson
In 2015, the Bank of Canada surveyed merchants and found that cash was nearly universally accepted (Fung, Huynh and Kosse 2017). Since 2015, retail payments in Canada have become increasingly digitalized, as many Canadians have adopted digital payment innovations like contactless cards and Interac e-Transfer.

The Cyber Incident Landscape

Nikil Chande & Dennis Yanchus
The Canadian financial system is vulnerable to cyber threats. But for many firms, cyber risk is difficult to quantify. We examine public information on past cyber incidents to better understand the current risk landscape and find that a holistic view is needed to fully grasp the nature of this risk.

The Size and Characteristics of Informal (“Gig”) Work in Canada

Olena Kostyshyna & Corinne Luu
Underlying wage growth has fallen short of what would be consistent with an economy operating with little or no slack. While many factors could explain this weakness, the availability of additional labour resources from informal (“gig”) work—not fully captured in standard measures of employment and hours worked—may play a role.

Non-Resident Taxes and the Role of House Price Expectations

Mikael Khan & Matthieu Verstraete
In recent years, the governments of Ontario and British Columbia have imposed taxes on purchases by non-Canadian residents of residential properties in certain jurisdictions.

The Effects of Inflation Targeting for Financial Development

Geoffrey Dunbar & Amy (Qijia) Li
The adoption of inflation targeting (IT) by central banks leads to an increase of 10 to 20 percent in measures of financial development, with a lag. We also find evidence that the financial sector benefits of IT adoption were higher for early-adopting central banks.

Assessing Global Potential Output Growth: April 2019

Fares Bounajm, Jean-Philippe Cayen, Michael Francis, Christopher Hajzler, Kristina Hess, Guillaume Poulin-Bellisle & Peter Selcuk
This note presents the updated estimates of potential output growth for the global economy through 2021. Global potential output is expected to grow by 3.3 per cent per year over the projection horizon.

Redemption Runs in Canadian Corporate Bond Funds?

Rohan Arora
Mutual funds employ a host of tools to manage redemption run risk. However, our results suggest that Canadian corporate bond funds may be vulnerable to redemption runs, especially when they are less liquid and when market volatility is high.

Potential Output in Canada: 2018 Reassessment

Andrew Agopsowicz, Dany Brouillette, Bassirou Gueye, Julien McDonald-Guimond, Jeffrey Mollins & Youngmin Park
This note summarizes the reassessment of potential output, conducted by the Bank of Canada for the April 2018 Monetary Policy Report. Overall, the profile for potential output growth is expected to remain flat at 1.8 per cent between 2018 and 2020 and 1.9 per cent in 2021. While population aging will continue to be a drag on potential output growth, this drag is expected to be offset by a pickup in trend labour productivity. This...

What Is Restraining Non-Energy Export Growth? Staff Analytical Note 2018-25 (English)

Dany Brouillette, Jose Dorich, Christopher D'Souza, Adrienne Gagnon & Claudia Godbout
This note summarizes the key findings from Bank of Canada staff analytical work examining the reasons for the recent weakness in Canadian non-energy exports. Canada steadily lost market share in US non-energy imports between 2002 and 2017, mostly reflecting continued and broad-based competitiveness losses. In addition to this evidence from the demand side, industry analysis points to supply constraints that are limiting export growth, such as physical capacity and shortages of skilled labour. Transportation bottlenecks,...

How do Canadian Corporate Bond Mutual Funds Meet Investor Redemptions?

Guillaume Ouellet Leblanc & Rohan Arora
When investors redeem their fund shares for cash, fixed-income fund managers can choose whether to draw on their liquid holdings or sell bonds in the secondary market. We analyze the liquidity-management decisions of Canadian corporate bond mutual funds, focusing on the strategies they use to meet investor redemptions.

Measuring Vulnerabilities in the Non-Financial Corporate Sector Using Industry- and Firm-Level Data

Timothy Grieder & Michal Lipsitz
Aggregate non-financial corporate debt-to-GDP has been growing rapidly in recent years and is at an all-time high. This growth began in 2011 and accelerated as the oil price shock affected the Canadian economy. In light of these developments, we use industry- and firm-level data to measure vulnerability indicators in the non-financial corporate sector. We find that developments in the oil and mining sectors have had a noticeable impact on aggregate non-financial corporate indebtedness and other...

Weakness in Non-Commodity Exports: Demand versus Supply Factors

Jose Dorich, Vadym Lepetyuk & Jonathan Swarbrick
We use the Terms-of-Trade Economic Model (ToTEM) to conduct demand- and supply-driven simulations, both of which deliver weakness in Canadian non-commodity exports relative to foreign activity in line with recent data. We then compare the predictions of the simulations with observed outcomes to shed light on the source of weakness in non-commodity exports. Our results suggest that demand factors, such as competitiveness challenges, likely play a dominant role in explaining the recent weakness in non-commodity...

Inflation Expectations and Learning about Monetary Policy

David Andolfatto, Scott Hendry & Kevin Moran
Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness. These observations are sometimes interpreted as evidence against rational expectations. The authors embed, within a standard monetary dynamic stochastic general-equilibrium model, an information friction and a learning mechanism regarding the interest-rate-targeting rule that monetary policy authorities follow. The learning mechanism enables optimizing economic agents to distinguish between transitory shocks to the policy rule and...

Guarding Against Large Policy Errors under Model Uncertainty

Gino Cateau
How can policy-makers avoid large policy errors when they are uncertain about the true model of the economy? The author discusses some recent approaches that can be used for that purpose under two alternative scenarios: (i) the policy-maker has one reference model for choosing policy but cannot take a stand as to how that model is misspecified, and (ii) the policy-maker, being uncertain about the economy's true structure, entertains multiple distinct models of the economy....

Quelques résultats empiriques relatifs à l'évolution du taux de change Canada/États-Unis

Ramdane Djoudad & David Tessier
L'objectif des auteurs est ici de voir dans quelle mesure des facteurs autres que les prix des produits de base et de l'énergie ont contribué à la dépréciation du dollar canadien depuis le début des années 1970. Les variables prises en compte à cette fin incluent entre autres les conditions budgétaires et la productivité. La méthode utilisée consiste à déterminer les variables susceptibles de jouer un rôle important, à long terme, dans l'évolution du taux...

Institutional Quality, Trade, and the Changing Distribution of World Income

Brigitte Desroches & Michael Francis
Conventional wisdom holds that institutional changes and trade liberalization are two main sources of growth in per capita income around the world. However, recent research (e.g., Rigobon and Rodrik 2004) suggests that the Frankel and Romer (1999) trade and growth finding is not robust to the inclusion of institutional quality. In this paper, the authors argue that this "trade and growth puzzle" can be explained once institutional quality is acknowledged as a determinant of the...

Information Sharing and Bargaining in Buyer-Seller Networks

Sofia Priazhkina & Frank H. Page
This paper presents a model of strategic buyer-seller networks with information exchange between sellers. Prior to engaging in bargaining with buyers, sellers can share access to buyers for a negotiated transfer. We study how this information exchange affects overall market prices, volumes and welfare, given different initial market conditions and information sharing rules. In markets with homogeneous traders, sharing always increases total trade volume. The market reaches Walrasian trade volume when there are more buyers...

Supply Shocks and Real Exchange Rate Dynamics: Canadian Evidence

Céline Gauthier & David Tessier
In this paper, we study the impact of supply shocks on the Canadian real exchange rate. We specify a structural vector-error-correction model that links the real exchange rate to different fundamentals. The identification scheme we use to recover the different shocks is based on long-run restrictions and allows us to decompose the real exchange rate according to different long-run trends, basically defined in terms of permanent shocks. Two main results emerge from our analysis. First,...

Alternative Trading Systems: Does One Shoe Fit All?

Nicolas Audet, Toni Gravelle & Jing Yang
This paper examines the factors that lead liquidity-motivated investors to choose the type of market structure they prefer. We assume that investors can choose between a dealership and a limit-order-book market. This study builds a theoretical model for both the dealership and order-book markets and develops a numerical method to solve the Nash equiibrium strategies of heterogeneous market participants. We find that a dealership market would be preferred by investors in an environment where customer...

The International Monetary Fund's Balance-Sheet and Credit Risk

Ryan Felushko & Eric Santor
The authors examine the characteristics of International Monetary Fund (IMF) lending from the 1960s to 2005. They find that there has been an increase in portfolio concentration, that lending terms have effectively lengthened, and that the proportion of total lending that occurs due to exceptional access has risen dramatically. Moreover, the typical IMF borrower represents a greater risk burden than in previous periods. The authors estimate a model of expected credit loss for the IMF's...

Modelling Risk Premiums in Equity and Foreign Exchange Markets

René Garcia & Maral Kichian
The observed predictability of excess returns in equity and foreign exchange markets has largely been attributed to the presence of time-varying risk premiums in these markets. For example, excess equity returns were found to be explained by various financial and economic variables. Similarly, in the foreign exchange market, the forward rate was found not to be an unbiased predictor of the future spot rate, and excess foreign exchange returns were shown to be partially explained...

Probing Potential Output: Monetary Policy, Credibility, and Optimal Learning under Uncertainty

James Yetman
The effective conduct of monetary policy is complicated by uncertainty about the level of potential output, and thus about the size of the monetary policy response that would be sufficient to achieve the targeted inflation rate. One possible response to such uncertainty is for the monetary authority to "probe," interpreted here as actively using its policy response to learn about the level of potential output. Monetary authorities have put significant emphasis in recent years on...

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