E - Macroeconomics and Monetary Economics

• Evaluating Real GDP Growth Forecasts in the Bank of Canada Monetary Policy Report

  Staff Analytical Note 2017-21 André Binette, Dmitri Tchebotarev

  This paper examines the quality of projections of real GDP growth taken from the Bank of Canada Monetary Policy Report (MPR) since they were first published in 1997. Over the last decade, it has become common practice among the central banking community to discuss forecast performance publicly.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Business fluctuations and cycles, Econometric and statistical methods, Monetary policy JEL Code(s): C, C5, C52, E, E3, E32, E37, E5, E52

• Cash Versus Card: Payment Discontinuities and the Burden of Holding Coins

  Staff Working Paper 2017-47 Heng Chen, Kim Huynh, Oz Shy

  Cash is the preferred method of payment for small value transactions generally less than $25. We provide insight to this finding with a new theoretical model that characterizes and compares consumers’ costs of paying with cash to paying with cards for each transaction.

  Content Type(s): Staff research, Staff working papers Topic(s): Bank notes, Econometric and statistical methods JEL Code(s): D, D0, D03, E, E4, E42

• On the Tail Risk Premium in the Oil Market

  Staff Working Paper 2017-46 Reinhard Ellwanger

  This paper shows that changes in market participants’ fear of rare events implied by crude oil options contribute to oil price volatility and oil return predictability. Using 25 years of historical data, we document economically large tail risk premia that vary substantially over time and significantly forecast crude oil futures and spot returns.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Econometric and statistical methods, Financial markets JEL Code(s): C, C5, C53, C58, D, D8, D84, E, E4, E44, G, G1, G12, G13, Q, Q4, Q43
• November 16, 2017

  Acceptance and Use of Payments at the Point of Sale in Canada

  Bank of Canada Review - Autumn 2017 Ben Fung, Kim Huynh, Anneke Kosse

  Merchants universally accept cash. Consumers widely hold cash but also carry debit and credit cards. The cost of using a method of payment has only a small influence on which method consumers use. Large merchants accept all payments, while only two-thirds of small and medium-sized businesses accept credit cards. Merchants report that credit cards are the costliest payment method compared with cash and debit cards. However, costs are not the only consideration. Merchant acceptance of credit accounts for the many con-sumers that want to use credit cards. This interaction between consumers and merchants is known as network externalities.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Bank notes, Digital currencies and fintech, Financial institutions, Payment clearing and settlement systems JEL Code(s): D, D2, D23, D24, E, E4, E41, E42, G, G2, G21, L, L2
• November 16, 2017

  An Update on the Neutral Rate of Interest

  Bank of Canada Review - Autumn 2017 José Dorich, Abeer Reza, Subrata Sarker

  The neutral rate serves as a benchmark for measuring monetary stimulus and provides a medium- to long-run anchor for the real policy rate. Global neutral rate estimates have been falling over the past few decades. Factors such as population aging, high corporate savings, and low trend productivity growth are likely to continue supporting a low global neutral rate. These global factors as well as domestic factors are exerting downward pres-sure on the Canadian real neutral rate, which is estimated to be between 0.5 to 1.5 per cent. This low neutral rate has important implications for monetary policy and financial stability.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Interest rates, International topics, Potential output, Recent economic and financial developments JEL Code(s): E, E4, E43, E5, E52, E58, F, F0, F01, F4, F43, O, O4
• November 16, 2017

  An Initial Assessment of Changes to the Bank of Canada’s Framework for Market Operations

  Bank of Canada Review - Autumn 2017 Kaetlynd McRae, Sean Durr, David Manzo

  The Bank of Canada made changes to several of the tools that make up its framework for operations and liquidity provision. These changes came about after a comprehensive re-view of the framework and are designed to help the Bank better achieve its objectives of reinforcing the target for the overnight rate and supporting the well-functioning of Cana-dian financial markets under normal market conditions.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Monetary policy framework, Monetary policy implementation, Monetary policy transmission, Payment clearing and settlement systems JEL Code(s): E, E4, E42, E44, E5, E52, E58, G, G0, G01, G1, G18

• Communicating Uncertainty in Monetary Policy

  Staff Discussion Paper 2017-14 Sharon Kozicki, Jill Vardy

  While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Credibility, Monetary policy, Monetary policy and uncertainty, Monetary policy communications JEL Code(s): E, E5, E52, E58, E6, E61, E65

• Monetary Policy Under Uncertainty: Practice Versus Theory

  Staff Discussion Paper 2017-13 Rhys R. Mendes, Stephen Murchison, Carolyn A. Wilkins

  For central banks, conducting policy in an environment of uncertainty is a daily fact of life. This uncertainty can take many forms, ranging from incomplete knowledge of the correct economic model and data to future economic and geopolitical events whose precise magnitudes and effects cannot be known with certainty.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Monetary policy, Monetary policy and uncertainty JEL Code(s): E, E5, E52, E58, E6, E61, E65

• Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices

  Staff Discussion Paper 2017-12 Rose Cunningham, Min Jae Kim, Christian Friedrich, Kristina Hess

  In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Exchange rates, Inflation and prices, International topics, Monetary policy transmission JEL Code(s): E, E3, E31, F, F3, F31, F4, F41

• Digitalization and Inflation: A Review of the Literature

  Staff Analytical Note 2017-20 Karyne B. Charbonneau, Alexa Evans, Subrata Sarker, Lena Suchanek

  In the past few years, many have postulated that the possible disinflationary effects of digitalization could explain the subdued inflation in advanced economies. In this note, we review the evidence found in the literature. We look at three main channels.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Inflation and prices, Market structure and pricing, Productivity JEL Code(s): D, D2, D22, E, E3, E31, L, L8, L81, O, O3, O33