Bank of Canada Review - Autumn 1998

November 14, 1998
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BoC Review - Autumn 1998/Revue BdC - Automne 1998

Cover page

Ottoman five-kurush piece

This piece is silver and about the size of a twenty-five cent piece. It forms part of the National Currency Collection at the Bank of Canada.

Photography by James Zagon.
Content Type(s): Publications, Bank of Canada Review
November 14, 1998

Lower inflation: Benefits and costs

Bank of Canada Review - Autumn 1998 Donald Coletti, Brian O'Reilly
The federal government and the Bank of Canada have been committed for some time to achieving and maintaining price stability as a way to foster a rising standard of living for all Canadians. To support this objective, the inflation-control target range of 1 to 3 per cent was recently extended through to the end of 2001. By then, the government and the Bank plan to announce a long-run target for monetary policy. In this article, the authors provide an overview of the most recent empirical evidence on the benefits of lower inflation. They draw on an extensive earlier survey and on work presented at two recent conferences on price stability hosted by the Bank of Canada. They find that, when inflation and tax interactions are taken into account, there are large benefits to lowering inflation. When these benefits are compared with the transitional costs associated with lowering inflation, significant positive benefits remain. However, the authors note that the extension of the inflation-control targets to the end of 2001 allows further research to ensure an operational definition of price stability that will help Canadians achieve a high standard of living.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation: costs and benefits
November 13, 1998

Currency crises and fixed exchange rates in the 1990s: A review

Bank of Canada Review - Autumn 1998 Patrick Osakwe, Lawrence L. Schembri
Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates
November 12, 1998

The LVTS—Canada's Large-Value Transfer System

Bank of Canada Review - Autumn 1998 James Dingle
The LVTS is an electronic network for sending and receiving large-value payments. It is expected to become operational in the first half of 1999. Major chartered banks and other large deposit-taking institutions will provide access to the system for their clients in the financial, corporate and government sectors. Canada’s LVTS exceeds world standards for risk control in large-value systems. The author explains how this is achieved through the netting, bilateral and multilateral credit limits, collateral, and loss-sharing procedures used in the event of a default, and, as a last resort, a guarantee by the Bank of Canada. The LVTS gives participating institutions certainty of settlement for their LVTS positions every day, even if one or more participants default. This greatly reduces systemic risk in the financial system. Moreover, the LVTS supports finality of payment; that is, it makes funds unconditionally and irrevocably available to the receiver. Finality is highly desirable when the amount of the payment is substantial, or when exact timing is critical. Since the LVTS will carry the great majority of the value of all payments in Canada, it should be considered the core of the national payments system.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Payment clearing and settlement systems
November 11, 1998

A primer on the implementation of monetary policy in the LVTS environment

Bank of Canada Review - Autumn 1998 Donna Howard
The author summarizes the objectives and key elements of the framework that the Bank will use to implement monetary policy under the new payments system. The article includes a comparison of the key features of the pre-LVTS framework with that to be used in the LVTS environment. It also features a glossary of terms with respect to the Bank's monetary policy operations.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Monetary policy implementation, Payment clearing and settlement systems