### Best Before? Expiring Central Bank Digital Currency and Loss Recovery

Yu Zhu, Charles M. Kahn & Maarten van Oordt
"An important feature of physical cash payments is their resilience—they do not require electrical power or network coverage. Many central banks are exploring issuing digital cash products with similar offline payment functionality. An inconvenient aspect of physical cash is that it can be lost, and there is no way to recover it. We consider a potential feature to solve this problem for offline digital cash: an expiry date to automate personal loss recovery. With this feature...

### Payment Coordination and Liquidity Efficiency in the New Canadian Wholesale Payments System

We study the impact of the Bank of Canada’s choice of settlement mechanism in Lynx on participant behaviors, liquidity usage, payment delays and the overall operational efficiency of the new system.

### The Impact of Globalization and Digitalization on the Phillips Curve

Christian Friedrich & Peter Selcuk
COVID-19 has affected globalization and digitalization in opposing ways. Globalization—a process of increasingly stronger integration with the world economy where firms can easily access foreign capital and sell a considerable share of their production abroad—has stalled. The global response to the pandemic and the associated collapse in demand have led to a significant drop in trade and financial linkages between countries. Digitalization—firms’ greater use of digital technologies, such as digitizing information and automating manual tasks—has...

### The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence

Antoine Camous & Dmitry Matveev
Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. Typically, a government’s fiscal policy is responsible for taxes, debt and deficits, while the central bank’s objectives focus on price stability. This policy arrangement—with its strict separation of assignments—is widely seen as having been instrumental in avoiding monetary policy decisions that could lead to higher-than-optimal levels of inflation. However, rising levels of public debt have...

### Assessing global potential output growth and the US neutral rate: April 2022

Kyle Boutilier, Thomas J. Carter, Xin Scott Chen, Eshini Ekanayake, Louis Poirier, Peter Shannon, Akash Uppal & Lin Xiang
We expect global potential output growth to increase from 2.7% in 2021 to 2.9% by 2024. Compared with the April 2021 assessment, global potential output growth is marginally slower. The current range for the US neutral rate is 2% to 3%, 0.25 percentage points higher than staff’s last assessment.

### Bitcoin Awareness, Ownership and Use: 2016–20

Daniela Balutel, Marie-Helene Felt, Gradon Nicholls & Marcel C. Voia
As technology evolves, so does the way Canadians make payments. The Bank of Canada is therefore interested in researching the potential need for a digital alternative to cash. In a 2020 speech, Deputy Governor Tim Lane highlighted two scenarios that could warrant the launch of a central bank digital currency: - a decline in the use of cash - a rise in the use of cryptocurrencies. The Bank conducts regular surveys to monitor trends in...

### Asymmetric Systemic Risk

Bank regulation is based on the premise that risks spill over more easily from large banks to the banking system than vice versa. On the contrary, we document that risk transmission is stronger in the system-to-bank direction. We term this asymmetric systemic risk, measure it with net exposure metrics, and explore the consequences and channels behind it. We show that banks with positive net exposure to the system had higher default risk during the 2008...

Shota Ichihashi & Byung-Cheol Kim
We study competition for consumer attention in which platforms can sacrifice service quality for attention. A platform can choose the “addictiveness” of its service. A more addictive platform yields consumers a lower utility of participation but a higher marginal utility of allocating attention. We provide conditions under which increased competition can harm consumers by encouraging platforms to offer low-quality services. In particular, if attention is scarce, increased competition reduces the quality of services because business...

### COVID-19, Containment and Consumption

Tatjana Dahlhaus, Daniel Hyun, Antoine Poulin-Moore, Jaime Trujillo, Saarah Sheikh & Benjamin Straus
We assess the impact of the COVID-19 pandemic on consumption indicators by estimating the effects of government-mandated containment measures and of the willingness of individuals to voluntarily physically distance to prevent contagion. To do this, we use weekly panel regressions across Canadian provinces to study how differences in both containment measures and voluntary physical distancing affect consumption, proxied by transaction data. We also conduct a similar panel analysis across 28 advanced economies using retail mobility...

### More Than Words: Fed Chairs’ Communication During Congressional Testimonies

Michelle Alexopoulos, Xinfen Han, Oleksiy Kryvtsov & Xu Zhang
We measure soft information contained in the congressional testimonies of U.S. Federal Reserve Chairs and analyze its effect on financial markets. Our measures of Fed Chairs’ emotions expressed in words, voice and facial expressions are created using machine learning. Increases in the Chair’s text-, voice-, or face-emotion indices during these testimonies generally raise the S&P500 index and lower the VIX—indicating that these cues help shape market responses to Fed communications. These effects add up and...

### Housing demand in Canada: A novel approach to classifying mortgaged homebuyers

Mikael Khan
We introduce a novel approach to categorize mortgaged homebuyers into first-time homebuyers, repeat homebuyers and investors. We show how these groups contribute to activity in Canadian housing markets, and we analyze the differences in their demographic and financial characteristics.

### What Drives Bitcoin Fees? Using Segwit to Assess Bitcoin's Long-Run Sustainability

Coline Brown, Jonathan Chiu & Thorsten Koeppl
"Bitcoin is a decentralized payment system: a central institution to verify and settle transactions does not exist. What drives the transaction fees in this system? Can it remain tamper proof in the long run? We develop an empirical model to study how the demand for bitcoin influences transaction fees. To identify supply and demand effects, we analyze two types of events—two rapid price increases since late 2017 and the introduction of a new feature called...

### Predicting the Demand for Central Bank Digital Currency: A Structural Analysis with Survey Data

Jiaqi Li
"Many central banks are considering whether to issue a central bank digital currency (CBDC), which would allow people to have an account at the central bank itself. To inform this decision, policy-makers are interested in knowing how much of a CBDC people would hold and what design it should have.  This paper predicts Canadian households’ potential holdings of a CBDC and how different design features of a CBDC would affect their potential holdings. I view...

### Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design

Jonathan Chiu & Seyed Mohammadreza Davoodalhosseini
"Many central banks are contemplating issuing a central bank digital currency (CBDC). A CBDC would have implications for payments, banking and, more broadly, total demand and supply in the economy. Considering these effects, should the central bank issue a CBDC? And if so, should the CBDC be more like cash or bank deposits?   To answer these questions, we theoretically and quantitatively assess the effects of a CBDC on consumption, banking and welfare. Our model introduces new general equilibrium linkages across different types of retail transactions (including cash, deposits and credit) as well as a novel feedback effect from...

### Macroeconomic Predictions Using Payments Data and Machine Learning

James Chapman & Ajit Desai
Monitoring and predicting the economy’s short-term dynamics are vital in economic decision making. However, major economic indicators are released with a substantial delay, and policy-makers must therefore rely on sophisticated models to accurately estimate them. Consumers are increasingly adopting electronic payment methods—a trend that accelerated dramatically during the COVID-19 pandemic. The vast amounts of high-frequency data generated by electronic payments are available almost in real time. And thanks to recent advances in artificial intelligence and...

### Dynamic Privacy Choices

Shota Ichihashi
Imagine a consumer using a social media service. They use the application to read news or posts from friends. At the same time, the social media app learns about the consumer by analyzing their profile and monitoring their browsing habits. The more actively the consumer uses the service, the more data the app can collect, which often means a better experience for the consumer and higher revenue for the service. The consumer faces a trade-off:...

### A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality

Joel Wagner, Tudor Schlanger & Yang Zhang
We introduce bounded rationality, along the lines of Gabaix (2020), in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to provide a quantitative assessment of the macroeconomic impact of flexible inflation targeting and some alternative monetary policy regimes. These alternative monetary policy regimes are average-inflation targeting, price-level targeting and nominal gross domestic product level targeting. We consider these regimes’ performance with and...

### Transmission of Cyber Risk Through the Canadian Wholesale Payments System

Anneke Kosse & Zhentong Lu
In response to growing concerns about cyber and other operational risks—such as those related to climate change—international organizations, central banks and private sector entities have taken collaborative actions to increase the operational and data resilience of financial institutions and financial market infrastructures, including payment systems. In Canada, the Bank of Canada has established and leads the Canadian Financial Sector Resiliency Group and the Resilience of Wholesale Payments Systems (RWPS) initiative, which both offer a forum...

### Identifying Financially Remote First Nations Reserves

Heng Chen, Walter Engert, Kim Huynh & Daneal O’Habib
Chen et al. (2021) show that almost one-third of First Nations band offices in Canada are within 1 kilometre (km) of an automated banking machine (ABM) or financial institution (FI) branch and more than half are within 5 km. Further, over three-quarters of band offices are within 20 km of an ABM or FI branch and almost 90% are within 50 km. We focus on 49 First Nations locations that are more than 100 km...

### Cash and COVID-19: What happened in 2021

Heng Chen, Walter Engert, Kim Huynh, Daneal O’Habib, Joy Wu & Julia Zhu
We provide an update on the impact the COVID-19 pandemic on the demand for cash and the use of methods of payment based on data from the Bank Note Distribution System and from consumer surveys conducted in April and August 2021. Our key findings are as follows: Cash in circulation remained high throughout 2021, driven mainly by demand for large-denomination notes. Canadians’ holdings of cash on hand in April (median $70) and August (median$80)...

### How well can large banks in Canada withstand a severe economic downturn?

Andisheh Danaee, Harsimran Grewal, Bradley Howell, Guillaume Ouellet Leblanc , Xuezhi , Mayur Patel & Xiangjin Shen
We examine the potential impacts of a severe economic shock on the resilience of major banks in Canada. We find these banks would suffer significant financial losses but nevertheless remain resilient. This underscores the role well-capitalized banks and sound underwriting practices play in supporting economic activity in a downturn.

### Vertical Bargaining and Obfuscation

Edona Reshidi
Firms often take actions that make it more difficult for consumers to gather information about the prices of products. These practices are widespread in many markets—by both the retailers that sell directly to consumers and, often, by product manufacturers. For instance, manufacturers can obscure prices by imposing different restrictions that limit the information about prices available to consumers or by producing several similar models of their products. We analyze price obscuring practices in markets where...

### Uncertainty and Monetary Policy Experimentation: Empirical Challenges and Insights from Academic Literature

Matteo Cacciatore, Dmitry Matveev & Rodrigo Sekkel
Central banks face considerable uncertainty when conducting monetary policy. Some of the reasons for this include limitations of economic data, the unobservability of key macroeconomic variables such as potential output, structural changes to the economy and disagreements over the correct model for the transmission of monetary policy. At the same time, monetary policy is affected by uncertainty from various sources, including lack of or imperfect observation of economic variables, structural economic changes and possible misspecifications...

### Historical Data on Repurchase Agreements from the Canadian Depository for Securities

We develop an algorithm that extracts information about sale and repurchase agreements (repos) from disaggregated settlement data in order to generate a new historical dataset for research. Data from Canada’s fixed-income settlement authority, the Canadian Depository for Securities (CDS), is a valuable source of historical information on Canada’s fixed-income markets, especially from 2003 to 2016 when few other data sources were available. However, the CDS does not contain details on the terms of trade for...

### Household Heterogeneity and the Performance of Monetary Policy Frameworks

Abeer Reza, Mario He, Yang Zhang & Edouard Djeutem
Although inflation targeting (IT) has been keeping inflation low and stable over the past several decades, two leading and persistent trends raise the question of how well IT performs compared with other alternative monetary policy frameworks. On one hand, interest rates are on a path that has been declining persistently, which could increase the chances of the economy getting stuck in a low interest rate environment. On the other hand, inequality has been rising in...

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#### Affiliations

46
• Princeton University
1
• University of Michigan–Ann Arbor
1
• University of Orléans
1
• University of Gothenburg
1
• Alexandru Ioan Cuza University
1
• University of Bucharest
1
• University of Mannheim
1
• University of Toronto
1
• University of Alabama
1