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  • May 8, 1995

    Exchange rate fundamentals and the Canadian dollar

    Bank of Canada Review - Spring 1995 Robert Lafrance, Simon van Norden
    Views in the economic literature on the main factors that influence exchange rates have evolved over time in response to economic developments and new trends in economic theory. This article provides a brief interpretative survey of the main theories of exchange rate determination. The factors that influence exchange rate developments are varied and complex. However, the authors show that the broad movements of the Canada-U.S. real exchange rate since the early 1970s can be captured by a simple equation that highlights the role of commodity prices and Canada-U.S. interest rate differentials. The equation is used to interpret the evolution of the real exchange rate over the last two decades. At times, the real exchange rate deviates significantly from what the equation would predict. One explanation is that the equation omits certain factors that can influence the exchange rate, particularly in the short run. These may include fiscal policy variables, international indebtedness, political uncertainty, and investor sentiments—factors that are difficult to quantify but that have been particularly relevant in recent years.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates
  • May 7, 1995

    Disinflation in the 1990s: The experience of the industrialized world

    Bank of Canada Review - Spring 1995 Graydon Paulin
    Canada has not been alone in making substantial progress towards price stability. Average inflation in the industrialized countries fell markedly in the first half of the 1990s, the third such episode of broad-based disinflation in the last 20 years. By the latter part of 1994, inflation in many countries had fallen to rates that had not been sustained since the early 1960s, generally converging to within a range of 1 to 3 per cent. Despite the decline in inflation to similar low levels, there were a number of interesting developments across the industrialized countries. For example, the pace of disinflation slowed noticeably after 1992 despite continued weak demand conditions. Inflation in countries that experienced a sharp depreciation in their exchange rates in the first half of the 1990s was, on average, no higher than elsewhere. The author identifies various factors affecting inflation outcomes in the industrialized countries. These include special factors, such as changes to indirect taxes, as well as more fundamental determinants of inflation, including the degree of economic slack. The presence of these factors, and perhaps the way in which inflation responded to them, varied across countries. One common element, however, was an increased commitment by monetary authorities across the industrialized economies to the goal of achieving and maintaining price stability.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): International topics, Recent economic and financial developments
  • May 6, 1995

    Managing the federal government's cash balances: A technical note

    Bank of Canada Review - Spring 1995 Daryl Merrett, Serge Boisvert, Philippe Côté
    In addition to its primary role as the country's central bank, the Bank of Canada also acts as the federal government's banker and financial adviser. One of the activities associated with this role as fiscal agent is managing the government's Canadian dollar balances. This function is examined in this article. The main priority is to ensure that the government has sufficient cash to meet its daily needs. This requires careful forecasting and monitoring of the government's daily receipt and expenditure flows, as well as an ongoing borrowing program to refinance maturing debt and to replenish the balances during periods when outflows, on average, exceed inflows. The cost of borrowing to raise cash balances for the government is considerably higher than the interest earned on any balances that are available "on demand." To reduce this net cost, balances in excess of those required for daily needs are invested in "term" deposits that earn a higher rate of interest than that earned on the demand balances. The net cost of holding government balances has also been reduced through the use of cash management bills, which are flexible, short-term borrowing instruments that complement the government's regular weekly issues of 3-, 6- and 12-month treasury bills.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Debt management

  • Changes in the Inflation Process in Canada: Evidence and Implications

    Staff Working Paper 1995-5 Doug Hostland
    The Canadian economy is currently in transition from a period of disinflation to one with a very low and relatively stable inflation rate. Against this background, the author asks whether reduced-form parameters should be expected to be invariant to changes in the inflation process. This raises two empirical issues. The first relates to whether shifts […]
    Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices

  • Government Debt and Deficits In Canada: A Macro Simulation Analysis

    Staff Working Paper 1995-4 Tiff Macklem, David Rose, Robert Tetlow
    This paper examines the macroeconomic implications of rising government debt in Canada and the short-run costs and long-run benefits of stemming the rise. The discussion begins with an evaluation of the long-run consequences of increasing government indebtedness, first based on the simple arithmetic of the government's long-run budget constraint, and then based on simulations of […]
    Content Type(s): Staff research, Staff working papers Topic(s): Fiscal policy

  • Empirical Evidence on the Cost of Adjustment and Dynamic Labour Demand

    Staff Working Paper 1995-3 Robert Amano
    In this paper the author examines whether there is significant evidence of the effect of adjustment costs on Canadian labour demand. This is an important question, as sluggish adjustment of labour demand resulting from significant adjustment costs may be one factor that could help explain some of the unemployment persistence found in Canadian data. The […]
    Content Type(s): Staff research, Staff working papers Topic(s): Labour markets
  • March 30, 1995

    Uncertainty and the Transmission of Monetary Policy in Canada

    Lecture Gordon Thiessen York University, Glendon College Toronto, Ontario
    Just over seven years ago, my predecessor, John Crow, delivered the Hanson Memorial Lecture at the University of Alberta. In it, he discussed a number of issues relating to the conduct of Canadian monetary policy, including the goal of monetary policy, the transmission mechanism, the use of monetary aggregates as policy guides, financial market uncertainty, and the role of the exchange rate
    Content Type(s): Press, Speeches and appearances, Lectures

  • Estimating and Projecting Potential Output Using Structural VAR Methodology: The Case of the Mexican Economy

    Staff Working Paper 1995-2 Alain DeSerres, Alain Guay, Pierre St-Amant
    In this paper the authors show how potential output can be estimated and projected through an approach derived from the structural vector autoregression methodology. This approach is applied to the Mexican economy. To identify demand, supply and world oil shocks, the authors assume that demand shocks do not have a permanent effect on output and […]
    Content Type(s): Staff research, Staff working papers Topic(s): International topics, Potential output

  • The Bank of Canada's New Quarterly Projection Model, Part 2. A Robust Method for Simulating Forward-Looking Models

    Technical Report No. 73 John Armstrong, Richard Black, Douglas Laxton, David Rose
    In this report, we describe methods for solving economic models when expectations are presumed to have at least some element of consistency with the predictions of the model itself. We present analytical results that establish the convergence properties of alternative solution procedures for linear models with unique solutions. Only one method is guaranteed to converge, […]
    Content Type(s): Staff research, Technical reports Topic(s): Economic models JEL Code(s): C, C3, C32, C5, C53
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