1,300 Works

Labour Markets, Liquidity, and Monetary Policy Regimes

David Andolfatto, Scott Hendry & Kevin Moran
We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the market for labour. A change in monetary policy regime, modelled here as an exogenous reduction in the long-run target for the money-growth rate, results in a large and persistent increase in the interest rate owing to a persistent shortfall in liquidity. This persistent liquidity effect occurs because of the limited...

Non-Bank Investors and Loan Renegotiations

Teodora Paligorova & João A. C. Santos
We document that the structure of syndicates affects loan renegotiations. Lead banks with large retained shares have positive effects on renegotiations. In contrast, more diverse syndicates deter renegotiations, but only for credit lines. The former result can be explained with coordination theories. The puzzling effect of syndicate diversity in term loan renegotiations derives from the growth of collateralized loan obligations (CLOs) in the syndicated loan market and the coordination between these vehicles and lead banks....

The Macroeconomic Effects of Non-Zero Trend Inflation

Robert Amano, Steve Ambler & Nooman Rebei
The authors study the macroeconomic effects of non-zero trend inflation in a simple dynamic stochastic general-equilibrium model with sticky prices. They show that trend inflation leads to a substantial reduction in the stochastic means of output, consumption, and employment. It also leads to an increase in the variability and persistence of most aggregates. Price dispersion across firms unambiguously increases the welfare costs of inflation. The effects hold qualitatively no matter how sticky prices are modelled,...

Evaluating the Quarterly Projection Model: A Preliminary Investigation

Robert Amano, Kim McPhail, Hope Pioro & Andrew Rennison
This paper summarizes the results of recent research evaluating the Bank of Canada's Quarterly Projection Model (QPM). Because QPM consists of a steady-state model and a dynamic model, our evaluation work consists of two parts. The first part assesses the calibration of QPM's core steady-state using a variant of Canova's (1994, 1995) Monte Carlo approach. Using parameter values drawn from prior distributions, we assess QPM's sensitivity to various plausible parameter values. Our approach differs somewhat...

Volatility Transmission Between Foreign Exchange and Money Markets

Shafiq K. Ebrahim
This paper uses trivariate generalized autoregressive conditional heteroscedasticity (GARCH) models to study price and volatility spillovers between the foreign exchange and associated money markets. Three models are estimated using data on U.S. dollar/Canadian dollar, U.S. dollar/Deutsche mark, and U.S. dollar/Japanese yen daily exchange rate returns together with returns on 90-day Eurodollar, Euro Canada, Euromark, and Euroyen deposits. The paper finds strong evidence of price and volatility spillovers in all three models, and some volatility spillovers...

A Practical Guide to Swap Curve Construction

Uri Ron
The swap market has enjoyed tremendous growth in the last decade. With government issues shrinking in supply and increased price volatilities, the swap term structure has emerged as an alternative pricing, benchmark, and hedging mechanism to the government term structure. This paper outlines the advantages of using the swap curve, and provides a detailed methodology for deriving the swap term structure for marking to market fixed-income products. The paper concludes with a discussion of the...

Private Capital Flows, Financial Development, and Economic Growth in Developing Countries

Jeannine N. Bailliu
An important issue in the debate over the desirability of freer capital mobility for developing countries is whether capital flows have significant effects on economic growth. Proponents of capital account liberalization cite the growth-promoting attributes of capital inflows as a key benefit of financial integration for developing countries. Unfortunately, there is little empirical evidence to confirm or refute this claim, except for several studies that establish a positive link between inflows of foreign direct investment...

Habit Formation and the Persistence of Monetary Shocks

Hafedh Bouakez, Emanuela Cardia & Francisco J. Ruge-Murcia
This paper studies the persistent effects of monetary shocks on output. Previous empirical literature documents this persistence, but standard general-equilibrium models with sticky prices fail to generate output responses beyond the duration of nominal contracts. The paper constructs and estimates a general-equilibrium model with price rigidities, habit formation, and costly capital adjustment. The model is estimated by the maximum-likelihood method using U.S. data on output, the real money stock, and the nominal interest rate. Econometric...

Corporate Bond Spreads and the Business Cycle

Zhiwei Zhang
This paper examines the predictive power of credit spreads from the corporate bond market. The high-yield bond spread and investment-grade spread can explain 68 per cent and 42 per cent of output variations one year ahead, while the term spread based on government debts can explain only 12 per cent of them. For output forecasts up to one year ahead, the corporate bond spreads also outperform popular indicators such as the paper-bill spread, federal funds...

Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases

Martin Kuncl
Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. This supports investment and output. However, in a...

Quantitative Easing in a Small Open Economy: An International Portfolio Balancing Approach

Serdar Kabaca
This paper studies the effects of quantitative easing (QE) in a small open economy dynamic stochastic general-equilibrium model with international portfolio balancing. Portfolios are classified as imperfectly substitutable short-term and long-term subportfolios, each including domestic and foreign bonds. Unlike in standard small open economy models, both domestic and foreign bonds may be traded internationally. The model links the domestic term premium to the global term premium, and the implication of the model on the effectiveness...

Risk, Entropy, and the Transformation of Distributions

R. Mark Reesor & Don L. McLeish
The exponential family, relative entropy, and distortion are methods of transforming probability distributions. We establish a link between those methods, focusing on the relation between relative entropy and distortion. Relative entropy is commonly used to price risky financial assets in incomplete markets, while distortion is widely used to price insurance risks and in risk management. The link between relative entropy and distortion provides some intuition behind distorted risk measures such as value-at-risk. Furthermore, distorted risk...

What Do Survey Data Tell Us About US Businesses?

Anmol Bhandari, Serdar Birinci, Ellen McGrattan & Kurt See
This paper examines the reliability of survey data on business incomes, valuations, and rates of return, which are key inputs for studies of wealth inequality and entrepreneurial choice.

Interconnected Banks and Systemically Important Exposures

Alan Roncoroni, Stefano Battiston, Marco D’Errico, Grzegorz Halaj & Christoffer Kok
How do banks' interconnections in the euro area contribute to the vulnerability of the banking system? We study both the direct interconnections (banks lend to each other) and the indirect interconnections (banks are exposed to similar sectors of the economy). These complex linkages make the banking system more vulnerable to contagion risks.

Efficiency and Economies of Scale of Large Canadian Banks

Jason Allen & Ying Liu
The authors measure the economies of scale of Canada's six largest banks and their costefficiency over time. Using a unique panel data set from 1983 to 2003, they estimate pooled translog cost functions and derive measures of relative efficiency and economies of scale. The disaggregation of the data allows the authors to model Canadian banks as producing multiple outputs, including non-traditional activities. Given the long time span of the data set, they also incorporate technological...

Steps in Applying Extreme Value Theory to Finance: A Review

Younes Bensalah
Extreme value theory (EVT) has been applied in fields such as hydrology and insurance. It is a tool used to consider probabilities associated with extreme and thus rare events. EVT is useful in modelling the impact of crashes or situations of extreme stress on investor portfolios. Contrary to value-at-risk approaches, EVT is used to model the behaviour of maxima or minima in a series (the tail of the distribution). However, implementation of EVT faces many...

Inflation, Nominal Portfolios, and Wealth Redistribution in Canada

Cesaire Meh & Yaz Terajima
There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. An issue that has generally received relatively less attention in this debate is the redistributional effects of inflation. This omission is likely to be important since the welfare costs of inflation depend not only...

The Intergenerational Correlation of Employment: Is There a Role for Work Culture?

Gabriela Galassi, David Koll & Lukas Mayr
We document a substantial positive correlation of employment status between mothers and their children in the United States, linking data from the National Longitudinal Survey of Youth 1979 (NLSY79) and the NLSY79 Children and Young Adults. After controlling for ability, education and wealth, a one-year increase in a mother’s employment is associated with six weeks more employment of her child on average.

Privacy as a Public Good: A Case for Electronic Cash

Rod Garratt & Maarten van Oordt
Cash gives users a high level of privacy when making payments, but the use of cash to make payments is declining. People increasingly use debit cards, credit cards or other methods to pay.

The Distributional Effects of Conventional Monetary Policy and Quantitative Easing: Evidence from an Estimated DSGE Model

Stefan Hohberger, Romanos Priftis & Lukas Vogel
This paper compares the distributional effects of conventional monetary policy and quantitative easing (QE) within an estimated open-economy DSGE model of the euro area.

Model Uncertainty and Wealth Distribution

Edouard Djeutem & Shaofeng Xu
This paper studies the implications of model uncertainty for wealth distribution in a tractable general equilibrium model with a borrowing constraint and robustness à la Hansen and Sargent (2008). Households confront model uncertainty about the process driving the return of the risky asset, and they choose robust policies.

State-Dependent or Time-Dependent Pricing: Does It Matter for Recent U.S. Inflation?

Peter J. Klenow & Oleksiy Kryvtsov
Inflation equals the product of two terms: an extensive margin (the fraction of items with price changes) and an intensive margin (the average size of those changes). The variance of inflation over time can be decomposed into contributions from each margin. The extensive margin figures importantly in many state-dependent pricing models, whereas the intensive margin is the sole source of inflation changes in staggered time-dependent pricing models. We use micro data collected by the U.S....

Recent Developments in Self-Employment in Canada

Nadja Kamhi & Danny Leung
The authors document the recent evolution of the self-employment rate in Canada. Between 1987 and 1998, the self-employment rate rose 3.5 percentage points from 13.8 per cent to 17.3 per cent. In contrast, over the 1999 to 2002 period, the self-employment rate fell by 1.9 percentage points, returning the self-employment rate in 2002 to a level only 0.2 percentage points higher than in 1992. The authors explore the possible explanations for this reversal. They describe...

Do Exchange Rates Affect the Capital-Labour Ratio? Panel Evidence from Canadian Manufacturing Industries

Danny Leung & Terence Yuen
Using industry-level data for Canadian manufacturing industries from 1981 to 1997, the authors find empirical evidence of a negative relationship between the capital-labour ratio and the user cost of capital relative to the price of labour. A 10 per cent increase in the user cost of the machinery and equipment (M&E) relative to the price of labour results in a 3.3 per cent decrease in the M&E-labour ratio in the long run. Assuming complete exchange...

McCallum Rules, Exchange Rates, and the Term Structure of Interest Rates

Antonio Diez de los Rios
McCallum (1994a) proposes a monetary rule where policymakers have some tendency to resist rapid changes in exchange rates to explain the forward premium puzzle. We estimate this monetary policy reaction function within the framework of an affine term structure model to find that, contrary to previous estimates of this rule, the monetary authorities in Canada, Germany and the U.K. respond to nominal exchange rate movements. Our model is also able to replicate the forward premium...

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