E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

• Tattle-tails: Gauging downside risks using option prices

  Staff Analytical Note 2023-13 Greg Adams, Maksym Tupis

  Options markets offer unique insights into the changing risks different assets face, which helps us better understand the broader risks to the Canadian economy. We show how option prices help reveal that investors did not anticipate large downside risks to either major Canadian banks or economic growth during the March 2023 financial sector system stress, a period when policy-makers and investors were unsure of what the future held for Canada’s economy.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Monetary policy and uncertainty, Recent economic and financial developments JEL Code(s): E, E4, E44, E5, E52

• Digitalization: Implications for Monetary Policy

  Staff Discussion Paper 2023-18 Vivian Chu, Tatjana Dahlhaus, Christopher Hajzler, Pierre-Yves Yanni

  We explore the implications of digitalization for monetary policy, both in terms of how monetary policy affects the economy and in terms of data analysis and communication with the public.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Digitalization, Inflation and prices, Market structure and pricing, Monetary policy, Monetary policy communications, Monetary policy transmission JEL Code(s): C, C4, C8, E, E3, E31, E32, E5, E52

• Is Money Essential? An Experimental Approach

  Staff Working Paper 2023-39 Janet Hua Jiang, Peter Norman, Daniela Puzzello, Bruno Sultanum, Randall Wright

  Monetary theory says that money is essential if it helps to achieve better incentive-feasible outcomes. We test this in the laboratory.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Economic models JEL Code(s): C, C9, C92, E, E4, E5

• It takes a panel to predict the future: What the stock market says about future economic growth in Canada

  Staff Analytical Note 2023-9 Greg Adams, Jean-Sébastien Fontaine

  Valuation ratios in the Canadian stock market can help reveal investors’ expectations about future economic growth because the impact of economic growth on valuation ratios can vary across industries. We find that this variation helps produce accurate forecasts of future growth of real gross domestic product in Canada. The forecasts from our model declined by just over 3 percentage points between January 2022 and February 2023—a period when the Bank of Canada rapidly increased the overnight rate. As well, we find that interest-rate-sensitive industries had an outsized contribution to this expected slowdown in growth. 

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Financial markets, Monetary policy transmission JEL Code(s): E, E4, E44, E47, E5, E52

• What Can Earnings Calls Tell Us About the Output Gap and Inflation in Canada?

  Staff Discussion Paper 2023-13 Marc-André Gosselin, Temel Taskin

  We construct new indicators of demand and supply for the Canadian economy by using natural language processing techniques to analyze earnings calls of publicly listed firms. Our results indicate that the new indicators could help central banks identify inflationary pressures in real time.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Central bank research, Domestic demand and components, Econometric and statistical methods, Inflation and prices, Potential output JEL Code(s): C, C1, C3, E, E3, E5

• What People Believe About Monetary Finance and What We Can(’t) Do About It: Evidence from a Large-Scale, Multi-Country Survey Experiment

  Staff Working Paper 2023-36 Cars Hommes, Julien Pinter, Isabelle Salle

  We conduct a large-scale survey to shed light on what people believe about public finance. An experiment demonstrates that central bank communication can persistently shift views on monetary financing. It further suggests that views on monetary financing impact support for fiscal discipline.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Fiscal policy, Monetary policy JEL Code(s): C, C8, C83, E, E5, E58, E6, E60, E62, E7, E70, G, G5, G53, H, H3, H31

• Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance

  Staff Working Paper 2023-35 Amina Enkhbold

  I study how banking market concentration and reliance on wholesale funding affect monetary policy transmission to mortgage rates. I find that this transmission is imperfect and dampens the response of consumption, output, and housing prices.

  Content Type(s): Staff research, Staff working papers Topic(s): Financial institutions, Inflation targets, Monetary policy transmission, Wholesale funding JEL Code(s): E, E4, E44, E5, E52, G, G2, G21

• Time Use and Macroeconomic Uncertainty

  Staff Working Paper 2023-29 Matteo Cacciatore, Stefano Gnocchi, Daniela Hauser

  We estimate the effects of economic uncertainty on time use and discuss its macroeconomic implications. We develop a model to demonstrate that substitution between market and non-market work provides an additional insurance margin to households, weakening precautionary savings and labour supply and lowering aggregate demand, ultimately amplifying the contractionary effects of uncertainty.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Coronavirus disease (COVID-19), Domestic demand and components, Monetary policy and uncertainty JEL Code(s): E, E2, E24, E3, E32, E5, E52, J, J2, J22

• Reviewing Canada’s Monetary Policy Implementation System: Does the Evolving Environment Support Maintaining a Floor System?

  Staff Discussion Paper 2023-10 Toni Gravelle, Ron Morrow, Jonathan Witmer

  At the onset of the pandemic, the Bank of Canada transitioned its framework for monetary policy implementation from a corridor system to a floor system, which it has since decided to maintain. We provide a comprehensive analysis of both frameworks and assess their relative merits based on five key criteria that define a sound framework.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Market structure and pricing, Monetary policy implementation, Payment clearing and settlement systems JEL Code(s): D, D4, D47, E, E4, E42, E5, E58

• Potential output and the neutral rate in Canada: 2023 assessment

  Staff Analytical Note 2023-6 Julien Champagne, Christopher Hajzler, Dmitry Matveev, Harlee Melinchuk, Antoine Poulin-Moore, Galip Kemal Ozhan, Youngmin Park, Temel Taskin

  We expect that potential output growth will rebound from 1.4% in 2022 to 2.2% on average between 2023 and 2026. We revised down our estimates of growth over 2022–25 relative to the April 2022 assessment. The Canadian nominal neutral rate remains unchanged—in the range of 2% to 3%.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Economic models, Interest rates, Labour markets, Monetary policy, Potential output, Productivity JEL Code(s): E, E2, E3, E4, E5