1,455 Works

Interest Rate Uncertainty as a Policy Tool

Fabio 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...

Characterizing Breadth in Canadian Economic Activity

Taylor 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.

Financial Conditions Indexes for Canada

Céline Gauthier, Christopher Graham & Ying Liu
The authors construct three financial conditions indexes (FCIs) for Canada based on three approaches: an IS-curve-based model, generalized impulse-response functions, and factor analysis. Each approach is intended to address one or more criticisms of the monetary conditions index (MCI) and existing FCIs. To evaluate their three FCIs, the authors consider five performance criteria: the consistency of each FCI's weight with economic theory, its graphical ability to predict turning points in the business cycle, its dynamic...

What Drives Exchange Rates? New Evidence from a Panel of U.S. Dollar Bilateral Exchange Rates

Jean-Philippe Cayen, Donald Coletti & René Lalonde
We use a novel approach to identify economic developments that drive exchange rates in the long run. Using a panel of six quarterly U.S. bilateral real exchange rates – Australia, Canada, the euro, Japan, New Zealand and the United Kingdom – over the 1980-2007 period, a dynamic factor model points to two common factors. The first factor is driven by U.S. shocks, and cointegration analysis points to a long-run statistical relationship with the U.S. debt-to-GDP...

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.

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.

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....

Managing Adverse Dependence for Portfolios of Collateral in Financial Infrastructures

Alejandro Garcia & Ramazan Gençay
We propose a framework that allows a portfolio manager to quantify the probability of simultaneous losses in multiple assets of a collateral portfolio. Using this framework, we propose a methodology to conduct stress tests on the market value of the portfolio of collateral when undesirable extreme dependence occurs. This framework permits us to quantify the potential impact on the portfolio returns of systemic events that change, or 'break down', the historical comovement structure, imposing an...

Domestic versus External Borrowing and Fiscal Policy in Emerging Markets

Garima Vasishtha
Domestic public debt issued by emerging markets has risen significantly relative to international debt in recent years. Some recent empirical evidence also suggests that sovereigns have defaulted differentially on debt held by domestic and external creditors. Standard models of sovereign debt, however, mainly focus on how the actions of foreign creditors influence default decisions of sovereigns. Contrasting this one-sided focus, this paper adds to a new theoretical literature that points at the possibility of default...

Inventories, Markups and Real Rigidities in Sticky Price Models of the Canadian Economy

Oleksiy Kryvtsov & Virgiliu Midrigan
Recent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S. This paper applies Kryvtsov and Midrigan's model to the case of Canada. The model predicts that if costs of production...

Sovereign Default Risk Premia, Fiscal Limits and Fiscal Policy

Huixin Bi
We develop a closed economy model to study the interactions among sovereign risk premia, fiscal limits, and fiscal policy. The stochastic fiscal limits, which measure the ability and willingness of the government to service its debt, arise endogenously from a dynamic Laffer curve. The distribution of fiscal limits is country-specific, depending on the size of the government, the degree of countercyclical policy responses, economic diversity, and political uncertainty, among other characteristics. The model rationalizes different...

Real-Time Analysis of Oil Price Risks Using Forecast Scenarios

Christiane Baumeister & Lutz Killian
Recently, there has been increased interest in real-time forecasts of the real price of crude oil. Standard oil price forecasts based on reduced-form regressions or based on oil futures prices do not allow consumers of forecasts to explore how much the forecast would change relative to the baseline forecast under alternative scenarios about future oil demand and oil supply conditions. Such scenario analysis is of central importance for end-users of oil price forecasts interested in...

Perhaps the FOMC Did What It Said It Did: An Alternative Interpretation of the Great Inflation

Kozicki Sharon & P.A. Tinsley
This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of U.S. monetary policy and in the implied central-bank target for inflation. Empirical results support a description of policy with an effective inflation target of roughly 7 percent in the 1970s. Moreover, the evidence suggests that mismeasurement of the degree of economic slack was largely irrelevant for explaining the Great Inflation while...

Une analyse empirique du lien entre la productivité et le taux de change réel Canada-É-U

David Dupuis & David Tessier
L'écart relatif de productivité entre le Canada et les États-Unis est redevenu ces derniers temps un sujet controversé. Selon certains, une des causes de cet écart relatif serait la dépréciation graduelle qu'enregistre le taux de change depuis plus de 20 ans. Ainsi, la hausse du taux de change rendrait artificiellement les firmes canadiennes plus compétitives, ce qui tendait à diminuer les incitatifs de celles-ci à être plus productives. Notre objectif est d'étudier les liens empiriques...

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....

Electronic Transactions as High-Frequency Indicators of Economic Activity

John W. Galbraith & Greg Tkacz
Since the advent of standard national accounts data over 60 years ago, economists have traditionally relied on monthly or quarterly data supplied by central statistical agencies for macroeconomic modelling and forecasting. However, technological advances of the past several years have resulted in new high-frequency data sources that could potentially provide more accurate and timely information on the current level of economic activity. In this paper we explore the usefulness of electronic transactions as real-time indicators...

The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation

Jim Day & Ron Lange
This paper examines the relationship between the term structure of interest rates and future changes in inflation for Canada using a newly constructed par-value yield series. The main conclusion of the empirical work is that the slope of the nominal term structure from 1- to 5-year maturities is a reasonably good predictor of future changes in inflation over these horizons. This result is similar to that obtained for the United States and other countries. Results...

Price Level Targeting: What Is the Right Price?

Malik Shukayev & Alexander Ueberfeldt
Various papers have suggested that Price-Level targeting is a welfare improving policy relative to Inflation targeting. From a practical standpoint, this raises an important yet unanswered question: What is the optimal price index to target? This paper derives the optimal price level targeting index defined over the eight main components of the Consumer Price Index. It finds that such an index places a heavier weight, relative to the expenditure weight, on sectors with slow price...

Leverage, Balance Sheet Size and Wholesale Funding

H. Evren Damar, Cesaire Meh & Yaz Terajima
Some evidence points to the procyclicality of leverage among financial institutions leading to aggregate volatility. This procyclicality occurs when financial institutions finance their assets with non-equity funding (i.e., debt financed asset expansions). Wholesale funding is an important source of market-based funding that allows some institutions to quickly adjust their leverage. As such, financial institutions that rely on wholesale funding are expected to have higher degrees of leverage procyclicality. Using high frequency balance sheet data for...

Canada's Exchange Rate Regime and North American Economic Integration: The Role of Risk-Sharing Mechanisms

Zahir Antia, Ramdane Djoudad & Pierre St-Amant
Our contribution in this paper is threefold. First, we survey the empirical literature on consumption smoothing mechanisms of regional economic shocks. Second, building on the work of Asdrubali et al. (1996), we present evidence on the role played by various smoothing mechanisms for specific economic shocks affecting Canadian provinces. Third, we assess whether smoothing mechanisms play a role at the North American level in facilitating the adjustment to shocks affecting Canada and the United States...

How Fast Can China Grow? The Middle Kingdom’s Prospects to 2030

Jeannine Bailliu, Mark Kruger, Argyn Toktamyssov & Wheaton Welbourn
Given its size and importance for global commodity markets, the question of how fast the Chinese economy can grow over the medium term is an important one. This paper addresses this question by examining the evolution of the supply side of the Chinese economy over history and projecting how it will evolve over the next 15 years. Using a Cobb-Douglas production function, we decompose the growth of trend GDP into those of the capital stock,...

Consumer Credit with Over-optimistic Borrowers

Florian Exler, Igor Livshits, James MacGee & Michèle Tertilt
Does the presence of borrowers with behavioural biases create a need for regulation to limit the misuse of credit? Proponents of consumer finance regulations often argue that some consumers overborrow because of behavioural biases, which leads them to become heavily indebted. In contrast, opponents maintain that regulations harm borrowers by increasing the cost of borrowing and limiting access to credit. We use a model with both “rational” and “behavioural” consumers to examine what occurs when...

Modelling Payments Systems: A Review of the Literature

Jonathan Chiu & Alexandra Lai
Payments systems play a fundamental role in an economy by providing the mechanisms through which payments arising from transactions can be settled. The existing literature on the economics of payments systems is large but loosely organized, in that each model uses a distinct set-up and sometimes a distinct equilibrium concept. As a result, it is not easy to generalize how model features are related to model implications. The authors conduct a non-technical survey of the...

Linking Real Activity and Financial Markets: The Bonds, Equity, and Money (BEAM) Model

Céline Gauthier & Fuchun Li
The authors estimate a small monthly macroeconometric model (BEAM, for bonds, equity, and money) of the Canadian economy built around three cointegrating relationships linking financial and real variables over the 1975–2002 period. One of the cointegrating relationships allows the identification of a supply shock as the only shock that permanently affects the stock market, and a demand shock that leads to important transitory stock market overvaluation. The authors propose a monetary policy reaction function in...

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  • Bank of Canada
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  • University of Michigan–Ann Arbor
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  • Federal Reserve Bank of New York
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  • Stanford University
  • Federal Reserve Board of Governors