Bank of Canada Review Article

• June 19, 2008

  China's Integration into the Global Financial System

  Bank of Canada Review - Summer 2008 Paul Masson, Wendy Dobson, Robert Lafrance

  Despite having the world's largest GDP when measured in terms of purchasing-power parities, the third-largest share in world exports, and the world's largest foreign exchange reserves, China has only a minor role in the global financial system. Its banks have a modest international presence; China's currency, the renminbi, is virtually not used outside the country; and Chinese capital markets are not a significant source of financing for foreign borrowers. China's modest level of integration into the global financial system is explained by the emphasis given to domestic policy priorities. As the Chinese economy matures, and as reforms strengthen the domestic financial system, China will become more important in global financial markets. Changes are already occurring as China's financial might is being channeled towards overseas investments, and the authorities have committed to greater exchange rate flexibility. These changes will facilitate integration into the global financial system. In this article, the authors describe the current situation and speculate on the future evolution of Chinese financial institutions and markets.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes, Financial markets, International topics
• June 18, 2008

  House Prices and Consumer Spending

  Bank of Canada Review - Summer 2008 Kimberly Beaton, Sylvie Morin, Ilan Kolet

  Flood, Morin, and Kolet examine the role of house prices in household consumption decisions. Considering a group of advanced economies, the authors find that the strength of the link between house prices and consumer spending depends on the institutional features of national mortgage markets.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Domestic demand and components, International topics, Recent economic and financial developments
• June 17, 2008

  A Tool for Assessing Financial Vulnerabilities in the Household Sector

  Bank of Canada Review - Summer 2008 Shubhasis Dey, Ramdane Djoudad, Yaz Terajima

  In this article, the authors build on the framework used in the Bank of Canada's Financial System Review to assess the evolution of household indebtedness and financial vulnerabilities in response to changing economic conditions. To achieve this, they first compare two microdata sets generated by Ipsos Reid's Canadian Financial Monitor and Statistics Canada's Survey of Financial Security. They find that the surveys are broadly comparable, despite methodological differences. This enables them to use the combined information content for the identification of the threshold value of the debt-service ratio (DSR). The article then presents an innovative framework that uses household-level microdata to simulate changes in the distribution of the DSR under various stress scenarios. The authors show how this framework can be used by analyzing the effects of two different scenarios on the distribution of the debt-service ratio and the impact on vulnerable households. This tool will enable researchers to refine their analyses of current risks to the financial health of Canadian households. The article concludes with comments on future directions for refining the Bank's analyses of household sector risk.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Econometric and statistical methods, Economic models, Financial stability
• June 16, 2008

  A Money and Credit Real-Time Database for Canada

  Bank of Canada Review - Summer 2008 Roobina Keshishbanoosy, Pierre St-Amant, Devin Ball, Ivan Medovikov

  Model-based forecasts of important economic variables are part of the range of information considered for monetary policy decision making.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credit and credit aggregates, Monetary aggregates, Monetary policy and uncertainty
• 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