Bank of Canada Review - Spring 1998

May 14, 1998
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BoC Review - Spring 1998/Revue BdC - Printemps 1998

Cover page

Papal Testone of Innocent XI

Called a testone, this silver coin is about the size of a Canadian two-dollar piece and forms part of the National Currency Collection at the Bank of Canada.

Photography by James Zagon.
Content Type(s): Publications, Bank of Canada Review
May 14, 1998

Recent developments in the monetary aggregates and their implications

Bank of Canada Review - Spring 1998
This article examines the developments in the monetary aggregates over the course of 1997 and their implications for future economic activity. The narrow aggregate, M1, grew rapidly in the first half of 1997 but slowed somewhat during the second half of the year. Much of the strong growth in this aggregate over the last several years has been associated with a higher demand for transactions balances as interest rates declined and economic activity revived. There were some special factors at play, however, that are discussed in the article. The Bank expects some slowing in M1 growth through 1998 and into 1999. This would be consistent with a trend of inflation within the inflation-control target range of 1 to 3 per cent over the next couple of years. Growth in the broad aggregate, M2+, continued to be distorted by the shift of savings out of fixed-term deposits into mutual funds. A broader aggregate that includes M2+, CSBs, and all mutual funds and thus provides a better estimate of broad money growth, grew at a moderate pace during 1997. The recent behaviour of the broad monetary aggregates continues to suggest that inflation will remain low in coming years.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Monetary aggregates
May 13, 1998

Canada-U.S. long-term interest differentials in the 1990s

Bank of Canada Review - Spring 1998 Kevin Clinton
Long-term Canada-U.S. interest spreads have changed remarkably during the 1990s. The unusually wide spreads of the first half of the decade have given way to an unprecedented run of negative yield differentials. In this article, the author examines the conceptual aspects of yields on international assets and their application to the Canada-U.S. situation. Prior to 1995, investors were unsure that, over the long run, inflation would meet the targets set by the government and the Bank. Policy credibility was undermined by large budget deficits and political uncertainty. In the second half of the decade, confidence was re-established as the fiscal positions of governments improved, long-run price stability became established, and political concerns about Quebec lessened. As long as these fundamentals hold, long-term rates should remain relatively low, even when short-term rates rise.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Interest rates, International topics
May 12, 1998

Measurement biases in the Canadian CPI: An update

Bank of Canada Review - Spring 1998 Allan Crawford
The consumer price index (CPI) is used to measure changes in the price level of consumer goods and services. As an indicator of changes in the cost of living, it is susceptible to various types of measurement biases. This article provides estimates of the size of these biases in the Canadian CPI. It concludes that the rate of increase in the CPI probably overstates the rate of increase in the cost of living by about 0.5 percentage points per year.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices
May 11, 1998

The use of forward rate agreements in Canada

Bank of Canada Review - Spring 1998 Jean-Yves Paquette, David Stréliski
In this article, the authors identify forward rate agreements, or FRAs, as short-term interest rate guarantee instruments negotiated by two parties, one of which is typically a bank. In outlining the main features of FRAs, the authors contrast them with BAX contracts (futures contracts on bankers' acceptances that are negotiated through the Montreal Exchange). The article then describes how market participants use FRAs to cover short-term interest rate risk. The final section deals with the way the Bank of Canada uses information from the FRA market as an indicator of interest rate expectations. Econometric models used to retrieve information from FRA rates, as well as the underlying assumptions, are discussed in an appendix.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Monetary and financial indicators