Bank of Canada Review - Autumn 2011

November 17, 2011
Share this page on Facebook
Share this page on X
Share this page on X
Share this page on LinkedIn
Share this page on LinkedIn Share this page by email
Available as: PDF

This issue features four articles that present research and analysis by Bank staff. The first focuses on reforming the international monetary system; the second on the role of collateral and haircut policy in central bank lending; and the third on the extraction of information from the Business Outlook Survey using principal-component analysis. The fourth reviews studies that model the counterfeiting of bank notes.
Content Type(s): Publications, Bank of Canada Review
November 17, 2011

The International Monetary System: An Assessment and Avenue for Reform

Bank of Canada Review - Autumn 2011 Lawrence L. Schembri, Eric Santor
The current international monetary system is in need of reform. This article first provides an assessment of the existing system, highlighting both its strengths and weaknesses. It notes that the system has not facilitated the symmetric and timely adjustment in the real exchange rate necessary to accommodate the integration of China and other emerging-market economies into the global economy. This lack of adjustment contributed to the global financial crisis and recession and, because it is forestalling the required rotation of global demand, is hindering the global recovery. The article then discusses reform of the system that would see all systemically important countries and currency areas adopt market-based and convertible floating exchange rates supported by appropriate monetary, fiscal and financial sector policy frameworks. It also examines the roles of the G-20 countries and major international financial institutions in promoting and facilitating the system’s transition.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes, International topics
November 17, 2011

Liquidity Provision and Collateral Haircuts in Payments Systems

Bank of Canada Review - Autumn 2011 James Chapman, Jonathan Chiu, Miguel Molico
Central banks play a pivotal role in well-functioning payments systems by providing liquidity via collateralized lending. This article discusses the role of collateral and haircut policy in central bank lending, as well as the distinguishing features of the central bank’s policy relative to private sector practices. It presents a model that explicitly incorporates the unique role of central banks in the payments system and argues that central banks must consider how their haircut policies affect the relative price and liquidity of assets, the market’s asset allocation, and the likelihood of participants to default. Furthermore, under extraordinary circumstances, there is a rationale for the central bank to temporarily reduce haircuts or broaden the list of eligible collateral to mitigate the shortage of liquidity in the market.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Financial stability, Payment clearing and settlement systems
November 17, 2011

Extracting Information from the Business Outlook Survey: A Principal-Component Approach

Bank of Canada Review - Autumn 2011 Lise Pichette, Lori Rennison
This article reviews recent work that uses principal-component analysis to extract information common to indicators from the Bank of Canada’s Business Outlook Survey (BOS). The authors use correlation analysis and an out-of-sample forecasting exercise to assess and compare the information content of the principal component with that of responses to key individual survey questions on growth in real gross domestic product and in real business investment. Results suggest that summarizing the common movements among BOS indicators may provide useful information for forecasting near-term growth in business investment. For growth in real gross domestic product, however, the survey’s balance of opinion on future sales growth appears to be more informative.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Business fluctuations and cycles, Regional economic developments
November 17, 2011

Modelling the Counterfeiting of Bank Notes: A Literature Review

Bank of Canada Review - Autumn 2011 Ben Fung, Enchuan Shao
The objective of this article is to improve our understanding of counterfeiting and its policy implications by reviewing research in this area. There has been almost no empirical work on counterfeiting because of the limited availability of counterfeiting data and related statistics. The authors therefore focus on theoretical studies that directly model the behaviour of the relevant economic agents. They first establish some stylized facts about counterfeiting to provide a general understanding of the problem. They then briefly review several models of counterfeiting and summarize their relevant insights, focusing on the implications of the findings for the incentive to counterfeit, social welfare and anti-counterfeiting policies. The authors find that the policy implications of these studies support the Bank’s comprehensive anti-counterfeiting strategy.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Bank notes