1,300 Works

The Role of Bank Capital in the Propagation of Shocks

Cesaire Meh & Kevin Moran
Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking...

Are Long-Horizon Expectations (De-)Stabilizing? Theory and Experiments

George Evans, Cars Hommes, isabelle salle & Bruce McGough
Most models in finance assume that agents make trading plans over the infinite future. We consider instead that they are boundedly rational and may only form forecasts over a limited horizon.

Empirical Likelihood Block Bootstrapping

Jason Allen, Allan W. Gregory & Katsumi Shimotsu
Monte Carlo evidence has made it clear that asymptotic tests based on generalized method of moments (GMM) estimation have disappointing size. The problem is exacerbated when the moment conditions are serially correlated. Several block bootstrap techniques have been proposed to correct the problem, including Hall and Horowitz (1996) and Inoue and Shintani (2006). We propose an empirical likelihood block bootstrap procedure to improve inference where models are characterized by nonlinear moment conditions that are serially...

Policy Coordination in an International Payment System

James Chapman
Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators. In this paper I show that two central banks operating in a non-cooperative way will not have an incentive to achieve the optimal allocation of goods. I further show that this non-cooperative outcome will be supported by a zero intraday interest...

Systemic Risk and Collateral Adequacy

Radoslav Raykov
Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk.

Online Privacy and Information Disclosure by Consumers

Shota Ichihashi
A consumer discloses information to a multi-product seller, which learns about the consumer’s preferences, sets prices, and makes product recommendations. While the consumer benefits from accurate product recommendations, the seller may use the information to price discriminate.

Le modèle USM d'analyse et de projection de l'économie américaine

René Lalonde
Dans cette étude, l'auteur présente un nouveau modèle de prévision et d'analyse de l'économie américaine (c.-à.-d. le modèle USM) construit à la Banque du Canada. Comparativement au mo-dèle précédent (le VSM), le USM comporte plusieurs avantages. Premièrement, il utilise les nou-velles méthodes d'identification du PIB potentiel basées sur les VAR structurels. Deuxièmement, il permet de mieux prendre en compte les caractéristiques actuelles de l'économie américaine (no-tamment le « boom » de la productivité) et d'endogénéiser...

Risk Perceptions and Attitudes

Miroslav Misina
Changes in risk perception have been used in various contexts to explain shorter-term developments in financial markets, as part of a mechanism that amplifies fluctuations in financial markets, as well as in accounts of "irrational exuberance." This approach holds that changes in risk perception affect actions undertaken in risky situations, and create a discrepancy between the risk attitude implied by those actions and the a priori description of risk attitude as summarized by the Arrow-Pratt...

An Analysis of Closure Policy under Alternative Regulatory Structures

Greg Caldwell
The author develops a theoretical model of bank closure. The regulatory decision about bank failure consists of two parts: whether to close and how to close. Assuming that the closure decision is credible, the welfare implications of two resolution regimes are considered. In one case, a meta-regulator supervises, closes, and resolves failed banks using an ex post efficient criterion. In the other case, a supervisor closes the bank while a deposit insurer resolves the closure...

Labour Market Adjustments to Exchange Rate Fluctuations: Evidence from Canadian Manufacturing Industries

Danny Leung & Terence Yuen
The authors provide some of the first empirical evidence on labour market adjustments to exchange rate movements in Canadian manufacturing industries. Generalized method of moments estimates that control for endogeneity show that there are significant changes in labour input when a change in the exchange rate occurs. During the 1981-97 period, the cumulative effect of a 10 per cent depreciation (appreciation) of the Canadian dollar was a 10 to 12.5 per cent increase (decline) in...

Endogenous Central Bank Credibility in a Small Forward-Looking Model of the U.S. Economy

René Lalonde
The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both...

Extreme Downside Risk in Asset Returns

Lerby Murat Ergun
Financial markets can experience sudden and extreme downward movements. Investors are highly concerned about the performance of their assets in such scenarios. Some assets perform badly in a downturn in the market; others have milder reactions.

On the Evolution of Multiple Jobholding in Canada

Olena Kostyshyna & Etienne Lalé
The number of workers who hold more than one job (a.k.a. multiple jobholders) has increased recently in Canada. While this seems to echo the view that non-standard work arrangements are becoming pervasive, the increase has in fact been trivial compared with the long-run rise of multiple jobholding that has occurred since the mid-1970s.

Monetary Policy and Government Debt Dynamics Without Commitment

Dmitry Matveev
I show that maturity considerations affect the optimal conduct of monetary and fiscal policy during a period of government debt reduction. I consider a New Keynesian model and study a dynamic game of monetary and fiscal policy authorities without commitment, characterizing the incentives that drive the choice of interest rate.

No Double Standards: Quantifying the Impact of Standard Harmonization on Trade

Julia Schmidt & Walter Steingress
Product standards are omnipresent in industrialized societies. Though standardization can be beneficial for domestic producers, divergent product standards have been categorized as a major obstacle to international trade. This paper quantifies the effect of standard harmonization on trade flows and characterizes the extent to which it changes the cost and demand structure of exporting.

The Economics of Cryptocurrencies—Bitcoin and Beyond

Jonathan Chiu & Thorsten Koeppl
Since the creation of Bitcoin in 2009, over 2,000 cryptocurrencies have been issued. We evaluate how well a cryptocurrency functions as a payment system.

The Simple Economics of Global Fuel Consumption

Doga Bilgin & Reinhard Ellwanger
This paper presents a structural framework of the global oil market that relies on information on global fuel consumption to identify flow demand for oil. We show that under mild identifying assumptions, data on global fuel consumption help to provide comparatively sharp insights on elasticities and other key structural parameters of the global oil market.

ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

Jose Dorich, Michael K. Johnston, Rhys R. Mendes, Stephen Murchison & Yang Zhang
This report provides a detailed technical description of an updated version of the Terms-of-Trade Economic Model (ToTEM II), which replaced ToTEM (Murchison and Rennison 2006) in June 2011 as the Bank of Canada’s quarterly projection model for Canada. ToTEM has been improved along a number of dimensions, with important changes to the model structure, including: (i) multiple interest rates, (ii) sector-specific demand specifications for consumption, housing investment and inventory investment, (iii) a role for financial...


Jorge Cruz Lopez, Jeffrey H. Harris, Christophe Hurlin & Christophe Pérignon
We present CoMargin, a new methodology to estimate collateral requirements for central counterparties (CCPs) in derivatives markets. CoMargin depends on both the tail risk of a given market participant and its interdependence with other participants. Our approach internalizes market interdependencies and enhances the stability of CCPs, thereby reducing the systemic risk concerns associated with them. CoMargin can be estimated using a model-free and scenario-based methodology, validated using formal statistical tests, and generalized to any number...

The Safety of Government Debt

Kartik Anand & Prasanna Gai
We examine the safety of government bonds in the presence of Knightian uncertainty amongst financial market participants. In our model, the information insensitivity of government bonds is driven by strategic complementarities across counterparties and the structure of trading relationships. We identify the frontier between safe and unsafe assets and show how the growth rate of the economy and its fiscal capacity interact with the degree of ambiguity amongst investors to determine the safe-asset equilibrium. We...

The Common Component of CPI: An Alternative Measure of Underlying Inflation for Canada

Mikael Khan, Louis Morel & Patrick Sabourin
In this paper, the authors propose a measure of underlying inflation for Canada obtained from estimating a monthly factor model on individual components of the CPI. This measure, labelled the common component of CPI, has intuitive appeal and a number of interesting features. In particular, it is not affected by sector-specific price movements that can distort the signal in many other measures of underlying inflation, and appears to capture price movements that are indicative of...

Measuring Uncertainty in Monetary Policy Using Implied Volatility and Realized Volatility

Bo Young Chang & Bruno Feunou
We measure uncertainty surrounding the central bank’s future policy rates using implied volatility computed from interest rate option prices and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following the most important policy actions taken by the Bank of Canada as a response to the financial crisis of 2007-08, such as the conditional commitment of 2009-10, the unscheduled cut in the target rate coordinated with other...

Multivariate Tests of Mean-Variance Efficiency and Spanning with a Large Number of Assets and Time-Varying Covariances

Sermin Gungor & Richard Luger
We develop a finite-sample procedure to test for mean-variance efficiency and spanning without imposing any parametric assumptions on the distribution of model disturbances. In so doing, we provide an exact distribution-free method to test uniform linear restrictions in multivariate linear regression models. The framework allows for unknown forms of non-normalities, and time-varying conditional variances and covariances among the model disturbances. We derive exact bounds on the null distribution of joint F statistics in order to...

Market Structure and Cost Pass-Through in Retail

Gee Hee Hong & Nicholas Li
We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through. To answer this question, we use scanner data from a large U.S. retailer to estimate product level pass-through for three different vertical structures: national brands, private label goods not manufactured by the retailer and private label goods manufactured by the retailer. Our findings emphasize that accounting for the interaction of vertical and horizontal structure is important in understanding...

A Blessing in Disguise: The Implications of High Global Oil Prices for the North American Market

Ron Alquist & Justin-Damien Guénette
We examine the implications of increased unconventional crude oil production in North America. This production increase has been made possible by the existence of alternative oil-recovery technologies and persistently elevated oil prices that make these technologies commercially viable. We first discuss the factors that have enabled the United States to expand production so rapidly and the glut of oil inventory that has accumulated in the Midwest as result of logistical challenges and export restrictions. Next,...

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