November 30, 2022
Staff research
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Regulatory Requirements of Banks and Arbitrage in the Post-Crisis Federal Funds Market
This paper explains the nature of interest rates in the U.S. federal funds market after the 2007-09 financial crisis. We build a model of the over-the-counter lending market that incorporates new aspects of the financial system: abundance of liquidity, different regulatory standards for banks, and arbitrage opportunities created by limited access to the facility granting interest on excess reserves. -
Stablecoins and Their Risks to Financial Stability
What risks could stablecoins pose to the financial system? We argue that the stabilization mechanisms of stablecoins give rise to the risk of confidence runs, which can propagate to broader cryptoasset markets and the traditional financial sector. We also argue that stablecoins can contribute to financial stability risks by facilitating the buildup of leverage and liquidity mismatch in decentralized finance. Such risks cannot be addressed by ensuring the price stability of stablecoins alone. Finally, we explore the potential implications of stablecoins for the current system of bank-intermediated credit and for monetary policy. -
Variable-rate mortgages with fixed payments: Examining trigger rates
We estimate the share of variable-rate mortgages with fixed payments that reached the so-called trigger rate—the interest rate at which mortgage payments no longer cover the principal. Amid rising interest rates, this share was close to 50% at the end of October 2022 and could potentially reach 65% in 2023. -
Are Working Hours Complements in Production?
Using Canadian matched employer-employee data, we show that working hours of different workers are gross complements in production rather than perfect substitutes, as is typically assumed by macroeconomic models of production. -
Canada’s Beveridge curve and the outlook for the labour market
Canada’s labour market is tight but beginning to ease. Unemployment will likely rise in turn, but the economy can avoid a recessionary surge given current conditions. Higher unemployment would nonetheless be material, especially for those directly impacted. -
Stagflation and Topsy-Turvy Capital Flows
Unregulated capital flows are likely excessive during a stagflation episode, owing to a macroeconomic externality operating through the economy’s supply side. Inflows raise domestic wages and cause unwelcome upward pressure on firm costs, yet market forces likely generate such inflows. Optimal capital flow management instead requires net outflows. -
Core inflation over the COVID-19 pandemic
We assess the usefulness of various measures of core inflation over the COVID-19 pandemic. We find that Cpi-trim and CPI-median provided the best signal of underlying inflation. The favourable performance of these measures stems from their lack of reliance on historical experience, an especially valuable feature in unprecedented times. -
Fiscal Policy in the Age of COVID-19: Does It “Get in All of the Cracks”?
The COVID-19 pandemic has caused an atypical recession in which some sectors of the economy boomed and others collapsed. This required a unique fiscal policy reaction to both support firms and stimulate activity in sectors with slack. Was fiscal policy able to get where it was needed? Mostly, yes. -
Considerations for the allocation of non-default losses by financial market infrastructures
Non-default losses of financial market infrastructures (FMIs) have gained attention due to their potential impacts on FMIs and FMI participants, and the lack of a common approach to address them. A key question is, who should absorb these losses?