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  • August 14, 2000

    Approaches to Current Stock Market Valuations

    Bank of Canada Review - Summer 2000 Bob Hannah
    The increase in North American stock prices in 1999 and early 2000 has generated interest in the valuation assumptions that would make these price levels sustainable. Here, commonly used valuation techniques are applied to stock markets in Canada and the United States. For the comparative yield approach, real interest rates (rather than nominal rates) are preferred as the comparator of choice to yields on stock market indexes. The spreads between real interest rates and stock market yields have generally increased over the last two years. The dividend-discount model (DDM) approach provides an analytic linkage between the equity-risk premium and the expected growth of dividends. It suggests that market values (measured at the end of February 2000) could be sustained only by rapid growth of dividends in the future or by the continued assumption of an uncharacteristically low risk premium on equity. The spectacular rise in the value of technology stocks in 1999 is noted (Chart 4), and then the valuation measures for the Canadian stock market excluding the technology sector are examined. When this is done with the comparative yield approach, yield spreads are slightly lower, and for the DDM approach, one does not need to assume as high a growth of dividends or as low a risk premium to validate market valuations. Two effects of the "new economy" on the stock market are noted. One is the lowering of dividend yields, as new-economy technology companies tend to have a high reinvestment rate and a low dividend payout rate. Another relates to the potential for a higher track for the economy's productivity growth, which would mean that higher-than-historical assumptions about future earnings growth would be more plausible. Several explanations for the decline in risk premiums on equity are considered. While short-term volatility in the stock market has, if anything, increased in recent years, low inflation and improved economic performance, along with demographics and investor preferences, may have contributed to a decline in the risk premium demanded by investors. A scenario of rapid growth of dividends in the near term slowing to historical norms in the longer term is examined. While this approach can go partway towards explaining high stock market valuations, it requires assumptions that are outside historical experience.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Market structure and pricing

  • Volatility Transmission Between Foreign Exchange and Money Markets

    Staff Working Paper 2000-16 Shafiq K. Ebrahim
    This paper uses trivariate generalized autoregressive conditional heteroscedasticity (GARCH) models to study price and volatility spillovers between the foreign exchange and associated money markets. Three models are estimated using data on U.S. dollar/Canadian dollar, U.S. dollar/Deutsche mark, and U.S. dollar/Japanese yen daily exchange rate returns together with returns on 90-day Eurodollar, Euro Canada, Euromark, and Euroyen deposits.
    Content Type(s): Staff research, Staff working papers Topic(s): International financial markets JEL Code(s): G, G1, G15

  • Private Capital Flows, Financial Development, and Economic Growth in Developing Countries

    Staff Working Paper 2000-15 Jeannine Bailliu
    An important issue in the debate over the desirability of freer capital mobility for developing countries is whether capital flows have significant effects on economic growth. Proponents of capital account liberalization cite the growth-promoting attributes of capital inflows as a key benefit of financial integration for developing countries.
    Content Type(s): Staff research, Staff working papers Topic(s): International topics JEL Code(s): F, F2, F21, F4, F43, O, O5, O50

  • Employment Effects Of Nominal-Wage Rigidity: An Examination Using Wage-Settlements Data

    Staff Working Paper 2000-14 Umar Faruqui
    The argument advocating a moderate level of inflation based on the downward nominal-wage rigidity (DNWR) hypothesis rests on three factors: its presence, extent, and negative impact in the labour market. This paper focuses on the employment effect of DNWR.
    Content Type(s): Staff research, Staff working papers Topic(s): Labour markets JEL Code(s): C, C2, C23, J, J2, J23, J3, J30
  • May 16, 2000

    Recent Developments in the Monetary Aggregates and Their Implications

    Bank of Canada Review - Spring 2000 Joseph Atta-Mensah
    Narrow Money—Transactions Money The growth rate of the narrow monetary aggregates picked up in 1999, reflecting the expansion in economic activity and the stabilization of interest rates. The sharp acceleration of the narrow aggregates in recent months suggests buoyant growth in GDP in coming quarters. Signs of a possible rise in inflation are also emerging. Over the longer run, for inflation to remain in the Bank's 1 to 3 per cent target range, the growth of narrow money would have to slow down from its current pace. In 1999, the growth rate of M1 also began to converge with that of the other narrow aggregates, M1+ and M1++. This suggests that the influence of the special factors that have been affecting the growth rate of M1 has diminished. Broad Money—"Store of Value" Household savings represent deferred consumption, and therefore the broad monetary aggregate provides information about future spending and, hence, inflation. In 1999, the very broad measure of money, M2++, grew at much the same rate as it did in 1998. This outcome is in line with inflation remaining in the inflation-control target range over the next couple of years.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Recent economic and financial developments
  • May 16, 2000

    Bank of Canada Review - Spring 2000

    BoC Review - Spring 2000

    Cover page

    A Seventeenth-Century Collector's Guide

    This volume, as well as the coins, forms part of the National Currency Collection, Bank of Canada, which, in addition to its numismatic holdings, also houses a reference library of more than 8,000 books, pamphlets, periodicals, and catalogues about money and banking.

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