1,300 Works

Composite Likelihood Estimation of an Autoregressive Panel Probit Model with Random Effects

Modeling and estimating persistent discrete data can be challenging. In this paper, we use an autoregressive panel probit model where the autocorrelation in the discrete variable is driven by the autocorrelation in the latent variable. In such a non-linear model, the autocorrelation in an unobserved variable results in an intractable likelihood containing high-dimensional integrals.

Safe Payments

Jonathan Chiu, Seyed Mohammadreza Davoodalhosseini, Janet Hua Jiang & Yu Zhu
Currently, there are two main types of payment instruments: cash and deposit-based electronic payments. Cash is a liability of the central bank and is perceived to be very safe. Deposits are liabilities of commercial banks; they are normally safe but are subject to default risk in times of crisis. As the economy becomes increasingly cashless, can we rely on the private sector to invest in the optimal level of safety in the electronic payment system?...

Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data

Rafael Gomez & Eric Santor
Microfinance institutions now serve over 10 million poor households in the developing and developed world, and much of their success has been attributed to their innovative use of peer group lending. There is very little empirical evidence, however, to suggest that group lending schemes offer a superior institutional design over lending programs that serve individual borrowers. The authors find empirical evidence that group lending does indeed lower borrower default rates more than conventional individual lending,...

Contribution of ICT Use to Output and Labour-Productivity Growth in Canada

Hashmat Khan & Marjorie Santos
There is ample evidence that information and communication technologies (ICT) contributed significantly to the surge in output and labour-productivity growth in the United States in the late 1990s. Does Canada share the U.S. experience? Has ICT influenced the trend productivity and output growth? Answers to these questions will help improve the Bank's forecasts of inflationary pressures. This paper examines the first question. A simple growth-accounting exercise suggests that, in contrast to the United States, Canada...

An Empirical Analysis of Liquidity and Order Flow in the Brokered Interdealer Market for Government of Canada Bonds

Christopher D'Souza, Charles Gaa & Jing Yang
The authors empirically measure Canadian bond market liquidity using a number of indicators proposed in the literature and detail, for the first time, price and trade dynamics in the Government of Canada secondary bond market. They find, consistent with Inoue (1999), that the Canadian brokered interdealer fixed-income market is relatively liquid for its size. Liquidity measures are analyzed relative to each other and across securities, and intraday patterns are identified. The authors' results show that...

Short-Run Dynamics in a Search-Theoretic Model of Monetary Exchange

Jonathan Chiu & Miguel Molico
It is a common belief that monetary policy has persistent short-run effects on the economy. However, the channels through which it operates are still not fully understood. We study the effects of "helicopter money"—distributing money in a uniform fashion—in an economy where agents have heterogeneous money holdings and are subject to random liquidity needs. We show that an expansionary monetary policy has persistently positive effects on economic output and social welfare. The policy reallocates purchasing...

Shift Contagion in Asset Markets

Toni Gravelle, Maral Kichian & James Morley
The authors develop a new methodology to investigate how crises cause the relationship between financial variables to change. Two possible sources of increased co-movement between markets during high-variance episodes are considered: larger common shocks operating through standard market linkages, and a structural change in the propagation of shocks between markets, called "shift contagion." The methodology has three key features: (i) high- and low-variance episodes are model-determined, rather than exogenously assigned; (ii) the markets where crises...

The Heterogeneous Effects of COVID-19 on Canadian Household Consumption, Debt and Savings

James MacGee, Thomas Michael Pugh & Kurt See
The impact of the COVID-19 pandemic on Canadian households’ debt and unplanned savings varies by household income. This paper examines how differences in households’ spending patterns and changes in employment due to COVID-19 shape debt accumulation and unplanned savings. We use the Survey of Household Spending to document how consumption expenditures on different goods vary with household income. We group goods by how easy or difficult it is for consumers to physically distance from them....

How Should Unemployment Insurance Vary over the Business Cycle?

Serdar Birinci & Kurt See
There is on-going debate about whether and how much unemployment benefits discourage recipients from looking for jobs. The optimal generosity of benefits ultimately depends on how individuals respond in their job search behaviour to more generous benefits. Careful consideration of the demographic characteristics of unemployed workers is crucial in measuring this responsiveness. These demographic characteristics include differences in wealth, eligibility for unemployment insurance (UI), and benefit take-up rates among unemployed people. We study the optimal...

Multilateral Adjustment and Exchange Rate Dynamics: The Case of Three Commodity Currencies

Jeannine Bailliu, Ali Dib, Takashi Kano & Lawrence L. Schembri
In this paper, we empirically investigate whether multilateral adjustment to large U.S. external imbalances can help explain movements in the bilateral exchange rates of three commodity currencies – the Australian, Canadian and New Zealand (ACNZ) dollars. To examine the relationship between exchange rates and multilateral adjustment, we develop a new regimeswitching model that augments a standard Markov-switching framework with a threshold variable. This enables us to model the exchange rate dynamics of our commodity currencies...

Oil Price Movements and the Global Economy: A Model-Based Assessment

Selim Elekdag, René Lalonde, Douglas Laxton, Dirk Muir & Paolo Pesenti
We develop a five-region version (Canada, an oil exporter, the United States, emerging Asia and Japan plus the euro area) of the Global Economy Model (GEM) encompassing production and trade of crude oil, and use it to study the international transmission mechanism of shocks that drive oil prices. In the presence of real adjustment costs that reduce the short- and medium-term responses of oil supply and demand, our simulations can account for large endogenous variations...

Cyclical Behavior of Debt and Equity Using a Panel of Canadian Firms

Francisco Covas & Wouter J. Den Haan
We document the cyclical behavior of debt, equity, and retained earnings for different firm categories using firm-level Canadian data. There is evidence of both procyclical equity and debt issuance for all firm categories but the timing differs. In particular, there is strong evidence that equity issuance increases in anticipation of an expansion. During this phase, some substitution between debt and equity takes place. After the expansion has reached its peak, equity issuance starts to decrease...

Unsecured Debt, Consumer Bankruptcy, and Small Business

Cesaire Meh & Yaz Terajima
In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large...

What Affects MFP in the Long-Run? Evidence from Canadian Industries

Danny Leung & Yi Zheng
In this paper we explore variables that may have an impact on multifactor productivity (MFP) in the long-run using the KLEMS database for Canada. We estimate a dynamic heterogeneous panel error-correction model of twelve 2-digit level industries. Variables investigated include ICT capital, outsourcing, competition, trade openness, public infrastructure, and R&D. Results suggest that over the 1976 – 2003 period ICT capital services, outsourcing and trade all had a positive impact on the level of industry...

A Consistent Test for Multivariate Conditional Distributions

Fuchun Li & Greg Tkacz
We propose a new test for a multivariate parametric conditional distribution of a vector of variables yt given a conditional vector xt. The proposed test is shown to have an asymptotic normal distribution under the null hypothesis, while being consistent for all fixed alternatives, and having non-trivial power against a sequence of local alternatives. Monte Carlo simulations show that our test has reasonable size and good power for both univariate and multivariate models, even for...

Evaluating Forecasts from Factor Models for Canadian GDP Growth and Core Inflation

Calista Cheung & Frédérick Demers
This paper evaluates the performance of static and dynamic factor models for forecasting Canadian real output growth and core inflation on a quarterly basis. We extract the common component from a large number of macroeconomic indicators, and use the estimates to compute out-of-sample forecasts under a recursive and a rolling scheme with different window sizes. Forecasts from factor models are compared with those from AR(p) models as well as IS- and Phillips-curve models. We find...

Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing

Fousseni Chabi-Yo, Dietmar Leisen & Eric Renault
Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices. A three funds separation theorem holds, adding a skewness portfolio to the market portfolio; the pricing kernel depends linearly only on the market return and its squared value. Our analysis extends Harvey and Siddique's (2000) conditional mean-variance-skewness asset pricing model...

Micro Foundations of Price-Setting Behaviour: Evidence from Canadian Firms

Daniel de Munnik & Kuan Xu
How do firms adjust prices in the marketplace? Do they tend to adjust prices infrequently in response to changes in market conditions? If so, why? These remain key questions in macroeconomics, particularly for central banks that work to keep inflation low and stable. The authors use the Bank of Canada's 2002–03 price-setting survey data to investigate Canadian firms' price-setting behaviour; they also analyze the micro foundations for the firms' pricing behaviour using count data and...

Uncollateralized Overnight Loans Settled in LVTS

Scott Hendry & Nadja Kamhi
Loan-level data on the uncollateralized overnight loan market is generated using payment data from Canada's Large Value Transfer System (LVTS) and a modified version of the methodology proposed in Furfine (1999). There were on average just under 100 loans extended in this market each day from March 2004 to March 2006 for a total daily value of about $5 billion. This makes the market slightly larger than the brokered repo market but only about one-tenth...

Macroprudential Rules and Monetary Policy when Financial Frictions Matter

Jeannine Bailliu, Cesaire Meh & Yahong Zhang
This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks. We estimate the model using Canadian data. Based on these estimates, we show that it is beneficial to react to financial imbalances. The size of these benefits depends on the...

House Price Dynamics: Fundamentals and Expectations

Eleonora Granziera & Sharon Kozicki
We investigate whether expectations that are not fully rational have the potential to explain the evolution of house prices and the price-to-rent ratio in the United States. First, a Lucas type asset-pricing model solved under rational expectations is used to derive a fundamental value for house prices and the price-rent ratio. Although the model can explain the sample average of the price-rent ratio, it does not generate the volatility and persistence observed in the data....

Time-Varying Effects of Oil Supply Shocks on the U.S. Economy

Baumeister Christiane & Gert Peersman
We use vector autoregressions with drifting coefficients and stochastic volatility to investigate how the dynamic effects of oil supply shocks on the U.S. economy have changed over time. We find a substantial decline in the short-run price elasticity of oil demand since the mid-eighties. This finding helps explain why an oil production shortfall of the same magnitude is associated with a stronger response of oil prices and more severe macroeconomic consequences over time, while an...

Explaining the Interplay Between Merchant Acceptance and Consumer Adoption in Two-Sided Markets for Payment Methods

Kim Huynh, Gradon Nicholls & Oleksandr Shcherbakov
Recent consumer and merchant surveys show a decrease in the use of cash at the point of sale. Increasingly, consumers and merchants have access to a growing array of payment innovations as substitutes for cash.

Trade Flows and Exchange Rates: Importers, Exporters and Products

Michael Devereux, Wei Dong & Ben Tomlin
Using highly disaggregated transaction-level trade data, we document the importance of new firm level trade partner relationships and the addition of new products to existing relationships in driving long-run import flows.

Tail Index Estimation: Quantile-Driven Threshold Selection

Jon Danielsson, Lerby Murat Ergun, Casper G. de Vries & Laurens de Haan
The most extreme events, such as economic crises, are rare but often have a great impact. It is difficult to precisely determine the likelihood of such events because the sample is small.

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