March 18, 2008

Canada's Experience with a Flexible Exchange Rate in the 1950s: Valuable Lessons Learned

Bank of Canada Review - Spring 2008 Lawrence L. Schembri
Schembri studies Canada's post-World War II experience in introducing a floating exchange rate, including its effects on the Canadian economy and its influence on the development of macroeconomic theory. In particular, Canada's flexible exchange rate and high degree of capital mobility with the United States provided an unprecedented experiment for macroeconomic policy. The successes and difficulties encountered by Canadian authorities in managing monetary and fiscal policy under this regime drew the interest of researchers at the International Monetary Fund and elsewhere and had a significant impact on the development of the Mundell-Fleming model, the path-breaking innovation in modern open-economy macroeconomics.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Exchange rate regimes, Monetary policy framework
March 17, 2008

Price Discovery Across Geographic Locations in the Foreign Exchange Market

Bank of Canada Review - Spring 2008 Chris D'Souza
The ongoing process of price discovery in foreign exchange markets provides valuable information to certain market participants. Recent empirical findings suggest that aggregate measures of order flow convey information about the fundamental value of the exchange rate. Using a market microstructure approach, D'Souza reports on a two-year study of completed transactions within the Canadian and Australian exchange rate markets to examine the relationship between exchange rate returns and trades initiated in different locations. Based on the information content of the trades, he finds that geographic location and hours of operation are two of the factors driving informed interdealer trading.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial markets, Market structure and pricing
March 16, 2008

Developing a Framework to Assess Financial Stability: Conference Highlights and Lessons

Bank of Canada Review - Spring 2008 Olivier de Bandt, Céline Gauthier, Pierre St-Amant
Central banks are still defining their approach to financial stability and are at an early stage in the development of useful models. The Bank of Canada's 2007 economic conference was organized to stimulate progress in the development of financial-stability frameworks. Among the highlights reported here are the discussions centred around three proposed frameworks: a contingent-claims-analysis framework, a semi-structural framework, and structural financial-stability models. Participants also reported on their experiences with stress-testing under the International Monetary Fund's Financial Sector Assessment Program and discussed the implications for financial stability of linkages among payment, clearing, and settlement systems.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial stability, Financial system regulation and policies, Payment clearing and settlement systems