1,300 Works

Estimating Canada’s Effective Lower Bound

Jonathan Witmer & Jing Yang
In 2009, the Bank of Canada set its effective lower bound (ELB) at 25 basis points (bps). Given the recent experience of Sweden, Denmark, Switzerland and the euro area with negative interest rates, we examine the economics of negative interest rates and suggest that cash storage costs are the source of a negative lower bound on interest rates. European experience demonstrates that markets can adapt to challenges associated with negative interest rates. However, given uncertainty...

Low Inflation in Advanced Economies: Facts and Drivers

Sanjana Bhatnagar, Anne-Katherine Cormier, Patrisha de Leon-Manlagnit, Elise Martin, Vikram Rai, Renaud St-Cyr, Subrata Sarker & Kristina Hess
Since the global financial crisis, core inflation has been persistently below target in most advanced economies. Recently, it has weakened further in several advanced economies despite gradually diminishing slack. This note reviews recent developments in core inflation across advanced economies and identifies distinctive patterns across regions. In many advanced economies outside of the United States, the decrease in core inflation started in 2016 and was driven primarily by goods prices—most likely because of lower export...

The Impacts of Minimum Wage Increases on the Canadian Economy

Dany Brouillette, Daniel Gao, Olivier Gervais & Calista Cheung
This note reviews the channels through which scheduled minimum wage increases over the coming years may affect Canadian economic activity and inflation and assesses their macroeconomic impacts. From reduced-form estimates of direct minimum wage pass-through, we find that consumer price index (CPI) inflation could be boosted by about 0.1 percentage point (pp) on average in 2018. A structural general equilibrium simulation suggests that minimum wage increases would reduce the level of gross domestic product by...

Monetary Policy and the Persistent Aggregate Effects of Wealth Redistribution

Martin Kuncl & Alexander Ueberfeldt
Monetary policy in the presence of nominal debt and labour supply heterogeneity creates a policy trade-off: a short-term economic stimulus leads to persistently reduced output over the medium term. Price-level targeting weakens this trade-off and is better able to stabilize inflation and output than inflation targeting.

Non-bank financial intermediation in Canada: a pulse check

Rohan Arora, Guillaume Bédard-Pagé, Philippe Besnier, Hayden Ford & Alan Walsh
The Canadian non-bank financial intermediation (NBFI) sector saw strong growth in 2018 and 2019. In 2020, COVID-19 caused a financial shock. We provide a preliminary analysis on the impact of COVID-19 on the sector as well as an update on its growth.

What cured the TSX Equity index after COVID-19?

Guillaume Ouellet Leblanc, Jean-Sébastien Fontaine & Ryan Shotlander
The TSX index rose by 9.5 percent in November 2020, adding large gains to an already sharp V-shaped recovery. The economic outlook improved at that time as well. We ask whether the stock market gains since last autumn are due to improving forecasts of firms’ earnings.

Sterilized Intervention in Emerging-Market Economies: Trends, Costs, and Risks

Robert Lavigne
The author examines recent trends in sterilized intervention among emerging-market economies, to determine the size and extent of this policy in relation to earlier periods of heavy reserve accumulation. He then analyzes whether the domestic costs and risks of substantial and prolonged sterilization are beginning to manifest themselves. In particular, the author discusses the fiscal costs of sterilization and the recent increase in non-market-friendly sterilization methods, such as the rapid rise in reserve requirement ratios.

Update on housing market imbalances and household indebtedness

Mikael Khan, Olga Bilyk & Matthew Ackman
Exceptional strength in the housing market during the pandemic is underpinning Canada’s economic recovery. However, two key vulnerabilities—housing market imbalances and elevated household indebtedness—have intensified.

Labour Shares and the Role of Capital and Labour Market Imperfections

Lena Suchanek
In continental Europe, labour shares in national income have exhibited considerable variation since 1970. Empirical and theoretical research suggests that the evolution of labour markets and labour market imperfections can, in part, explain this phenomenon. The author analyzes the role of capital market imperfections in the determination of the distribution of national income, comparing European and Anglo-Saxon countries. She uses a simple general-equilibrium model to trace the effects of credit and labour market imperfections on...

Tariffs and the Exchange Rate: Evidence from Twitter

Dmitry Matveev & Francisco Ruge-Murcia
"US commercial policy during the presidency of Donald Trump led to renewed interest in the macroeconomic effects of trade tariffs. It has become common to use tariffs and other restrictions on international trade in an attempt to boost the domestic economy. One factor affecting the impact of tariffs is the response of local currency after tariffs are imposed. The effects of tariff changes can be eased or overturned if the local currency appreciates and prevents...

Are There Gains from Pooling Real-Time Oil Price Forecasts?

Christiane Baumeister, Lutz Kilian & Thomas K. Lee
The answer as to whether there are gains from pooling real-time oil price forecasts depends on the objective. The approach of combining five of the leading forecasting models with equal weights dominates the strategy of selecting one model and using it for all horizons up to two years.

Sequencing Extended Monetary Policies at the Effective Lower Bound

Yang Zhang, Lena Suchanek, Jonathan Swarbrick, Joel Wagner & Tudor Schlanger
In response to the global COVID-19 pandemic, the Bank of Canada aggressively lowered its policy interest rate and provided additional easing using forward guidance and quantitative easing. In this analysis, we use simulations in the Bank of Canada’s projection model—the Terms-of-Trade Economic Model—to consider a suite of extended monetary policies (EMPs) to support the economy following the COVID-19 crisis. We focus on the implementation sequencing of three EMP options when the policy rate is at...

Chinese Monetary Policy and Text Analytics: Connecting Words and Deeds

Jeannine Bailliu, Xinfen Han, Barbara Sadaba & Mark Kruger
Chinese monetary policy is not yet well understood by the outside world. This is likely due to the complex nature of China’s monetary policy framework and the lack of independence of its central bank. The People’s Bank of China (PBOC) has multiple objectives and uses several monetary policy instruments whose importance has changed over time. This makes it challenging to infer the systematic patterns of the PBOC monetary policy from its observed behaviour. Information provided...

Capital Flows and Macroprudential Policies - A Multilateral Assessment of Effectiveness and Externalities

John Beirne & Christian Friedrich
This paper assesses the effectiveness and associated externalities that arise when macroprudential policies (MPPs) are used to manage international capital flows. Using a sample of up to 139 countries, we examine the impact of eight different MPP measures on cross-border bank flows over the period 1999-2009.

Retail Payment Innovations and Cash Usage: Accounting for Attrition Using Refreshment Samples

Heng Chen, Marie-Helene Felt & Kim Huynh
We exploit the panel dimension of the Canadian Financial Monitor (CFM) data to estimate the impact of retail payment innovations on cash usage. We estimate a semiparametric panel data model that accounts for unobserved heterogeneity and allows for general forms of non-random attrition.

Understanding the Cash Demand Puzzle

Janet Hua Jiang & Enchuan Shao
We develop a model to explain a puzzling trend in cash demand in recent years: the value of bank notes in circulation as a percentage of GDP has remained stable despite decreasing cash usage at points of sale owing to competition from alternative means of payment such as credit cards.

The Effects of Government Licensing on E-commerce: Evidence from Alibaba

Ginger Zhe Jin, Zhentong Lu, Xiaolu Zhou & Chunxiao Li
How does government licensing affect selling on online platforms? We examine the impact of China’s 2015 Food Safety Law on sellers and buyers on Alibaba, the largest e-commerce platform in that country.

Forecasting Short-Term Real GDP Growth in the Euro Area and Japan Using Unrestricted MIDAS Regressions

Maxime Leboeuf & Louis Morel
In this paper, the authors develop a new tool to improve the short-term forecasting of real GDP growth in the euro area and Japan. This new tool, which uses unrestricted mixed-data sampling (U-MIDAS) regressions, allows an evaluation of the usefulness of a wide range of indicators in predicting short-term real GDP growth.

Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions

Grzegorz Halaj & Sofia Priazhkina
"Central banks and regulators around the world routinely assess the ability of banks to survive hypothetical stress scenarios by conducting bank stress tests. During a stress scenario—think of the financial crisis of 2008–09—we would expect banks to modify their risk exposure and react to actions their competitors take. However, standard stress-test tools do not capture bank behaviours even under extreme stress scenarios. Assumptions about bank behaviours may impact the analysis of bank resilience and regulation during a financial crisis. Our new stress-testing tool challenges these assumptions. Banks under stress can strategically change their behaviour to maximize their value for shareholders. Using confidential Canadian supervisory data, we assess whether this value-maximizing behaviour can amplify a hypothetical stress scenario. We show that during a crisis, banks comply with regulatory...

(Optimal) Monetary Policy with and without Debt

Boris Chafwehé, Rigas Oikonomou, Romanos Priftis & Lukas Vogel
How should policy be designed at high debt levels, when fiscal authorities have little room to adjust taxes? Assigning the monetary authority a role in achieving debt sustainability makes it less effective in stabilizing inflation and output.

Qualitative Field Research in Monetary Policy Making

Christopher D'Souza & Jane Voll
Many central banks conduct economic field research involving in-depth interviews with external parties. But very little is known about how this information is used and its importance in the formation of monetary policy. We address this gap in the literature through a thematic analysis of open-ended interviews with senior central bank economic and policy staff who work closely with policy decision-makers. We find that these central bankers consider information from field research programs not just...

Estimating Policy Functions in Payments Systems Using Reinforcement Learning

Pablo S. Castro, Ajit Desai, Han Du, Rodney Garratt & Francisco Rivadeneyra
We demonstrate the ability of reinforcement learning techniques to estimate the best-response functions of banks participating in high-value payments systems—a real-world strategic game of incomplete information.

Methodology for Assigning Credit Ratings to Sovereigns

Philippe Muller & Jérôme Bourque
The investment of foreign exchange reserves or other asset portfolios requires an assessment of the credit quality of investment counterparties. Traditionally, foreign exchange reserve and asset managers have relied on credit rating agencies (CRAs) as the main source for credit assessments. The Financial Stability Board issued principles to reduce reliance on CRA ratings in standards, laws and regulations, in support of financial stability. Moreover, best practices in the asset management industry suggest that investors should...

What Explains Month-End Funding Pressure in Canada?

Christopher Sutherland
Historically, the Canadian overnight repo market persistently showed signs of funding pressure around month-end periods. Both the overnight repo rate and the Bank of Canada liquidity provision tend to rise in these windows. This paper proposes three hypotheses to explain this phenomenon. First, month-end funding pressure may be caused by search frictions. Market participants place a premium on liquidity around month-end periods because of the confluence of a generalized liquidity preference, heightened month-end forecast uncertainty...

A Three‐Frequency Dynamic Factor Model for Nowcasting Canadian Provincial GDP Growth

Tony Chernis, Calista Cheung & Gabriella Velasco
This paper estimates a three‐frequency dynamic factor model for nowcasting Canadian provincial gross domestic product (GDP). Canadian provincial GDP is released by Statistics Canada on an annual basis only, with a significant lag (11 months). This necessitates a mixed-frequency approach that can process timely monthly data, the quarterly national accounts and the annual target variable. The model is estimated on a wide set of provincial, national and international data. We assess the extent to which...

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  • 2021

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  • Bank of Canada
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