Bank of Canada Review - Winter 1994-1995

January 9, 1995
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BoC Review - Winter 1994-1995/Revue BdC - Hiver 1994-1995

Cover page

Canada: The Phenix Bank, one dollar, 1837

This one-dollar note is part of the National Currency Collection, Bank of Canada.

Photography by James Zagon.
Content Type(s): Publications, Bank of Canada Review
December 9, 1994

The term structure of interest rates as a leading indicator of economic activity: A technical note

Bank of Canada Review - Winter 1994-1995 Kevin Clinton
The spread between long-term and short-term interest rates has proven to be an excellent predictor of changes of economic activity in Canada. As a general rule, when long-term interest rates have been much above short-term rates, strong increases in output have followed within about a year; however, whenever the yield curve has been inverted for any extended period of time, a recession has followed. Similar findings exist for other countries, including the United States. But although Canadian and U.S. interest rates generally move quite closely together, the Canadian yield curve has been distinctly better at predicting future Canadian output. The explanation given for this result is that the term spread has reflected both current monetary conditions, which affect short-term interest rates, and expected real returns on investment and expectations of inflation, which are the main determinants of long-term rates. This article is mainly a summary of econometric work done at the Bank. It also touches on some of the extensive recent literature in this area.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Interest rates, Monetary and financial indicators
December 8, 1994

Some macroeconomic implications of rising levels of government debt

Bank of Canada Review - Winter 1994-1995 Tiff Macklem
The level of government debt in Canada relative to gross domestic product has risen steadily since the mid-1970s. Canada has not been alone in experiencing rising government indebtedness, but in comparison to other countries, Canada's debt load is now distinctly on the high side. The author reviews some of the effects of rising government debt levels on macroeconomic performance and provides some calculations aimed at illustrating their possible long-run impact on the Canadian economy. His analysis, which is based on a model of the Canadian economy used at the Bank of Canada, suggests that higher levels of government debt reduce both the level of output and the share of output that is available for domestic consumption. The central policy implication is that there are substantial benefits to halting the rise in government debt and thus preventing further erosion of consumption opportunities.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Fiscal policy, Recent economic and financial developments
December 7, 1994

Repo, reverse repo and securities lending markets in Canada

Bank of Canada Review - Winter 1994-1995 Ron Morrow
Repurchase agreements (repos), reverse repos and securities lending markets permit a variety of institutions to conduct a broad range of financial transactions efficiently. In addition, they allow financial market participants to augment the returns on their cash holdings and securities portfolios. Canadian repo and securities lending markets have grown rapidly in recent years, following the expansion of such markets in major financial centres around the world; the volume of transactions in Canada now averages between $35 billion and $50 billion per day. The author notes that structural and regulatory changes in Canada have played important roles in promoting this growth. The vast majority of repo and securities lending transactions involve securities issued by the Government of Canada—principally Government of Canada bonds.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets