Bank of Canada Review Article

• December 10, 2007

  Inflation Targeting, Price-Level Targeting, and Fluctuations in Canada's Terms of Trade

  Bank of Canada Review - Winter 2007-2008 Donald Coletti, René Lalonde

  Coletti and Lalonde compare inflation targeting and price-level targeting in the context of a small open economy subject to sizable terms-of-trade shocks. The authors summarize recent research that compares the ability of price-level targeting and inflation targeting to stabilize the macroeconomy when confronted with shocks similar to those experienced by Canada in recent years. Their preliminary results suggest that price-level targeting may represent a feasible alternative to traditional inflation targeting. Their article also provides insight into the direction of current research in this area at the Bank.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Inflation and prices, Monetary policy framework
• October 15, 2007

  The Global Foreign Exchange Market: Growth and Transformation

  Bank of Canada Review - Autumn 2007 William Barker

  Barker examines changes in the foreign exchange market, which is in a period of transition. Since the mid-1990s, three closely inter-related and mutually reinforcing factors–electronic trading platforms, a changing mix of market participants, and computer-driven algorithmic trading strategies–have been accelerating market growth and are creating a profound structural transformation. As the balance of market participation shifts between bank and non-bank accounts, large and small participants, and domestic and global players, the market is adopting some of the characteristics of an "exchange" model and is arguably becoming more liquid and operationally efficient.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial institutions, Financial markets
• October 14, 2007

  The Effect of China on Global Prices

  Bank of Canada Review - Autumn 2007 Michael Francis

  The dramatic growth in China's exports of consumer goods such as clothing, toys, and electronics, and imports of primary commodities such as oil and metals is having major effects on global supply and demand. In examining China's role in global relative price changes, Francis finds that downward pressure on the relative prices of consumer goods is likely to persist as China's large labour supply continues its migration into manufacturing. Likewise, China's size and growth will also remain key drivers of global commodities demand for some time. Despite these forces, inflation-targeting central banks have the tools to keep inflation close to target, thus offsetting any persistent upward or downward inflationary pressure.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, International topics, Recent economic and financial developments
• October 13, 2007

  Estimating the Cost of Equity for Canadian and U.S. Firms

  Bank of Canada Review - Autumn 2007 Lorie Zorn

  Financing costs are important for both firms and the economy, affecting investment decisions and, ultimately, economic growth. Despite concern among policy-makers that the cost of equity financing may be higher in Canada than in the United States, empirical evidence supporting this view is mixed. Yet Canadian firms may not undertake as many projects that could potentially enhance growth if the cost of equity financing in Canada is relatively high. The article summarizes research by Jonathan Witmer and Lorie Zorn on the influences on the cost of equity in Canada and the United States, using an updated methodology that controls for firm characteristics and aggregate-level factors. In their sample, the cost of equity was 30–50 basis points higher in Canada over 1988 to 2006 but appears to have dropped in the post-1997 period. The results have policy implications related to such factors as firm size, disclosure, and securities regulation and enforcement.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, International topics
• October 12, 2007

  Bank of Canada Workshop on Derivatives Markets in Canada and Beyond

  Bank of Canada Review - Autumn 2007 Toni Gravelle

  At this 2006 workshop hosted by the Bank of Canada, an international group of market participants, regulators, and policy-makers gathered to assess recent developments in the derivatives market. Among the topics discussed were the recent prodigious growth in risk-transfer instruments, including credit derivatives and inflation-linked derivatives, as well as the accompanying challenges and benefits. Overall, the development of derivatives markets was seen as providing broad economic benefits, including more complete financial markets, improved market liquidity, and increased capacity of the financial system to effectively price and bear risk. Yet concern was also voiced that market participants do not fully understand the risks that arise in trading credit derivatives.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Financial system regulation and policies
• October 10, 2007

  The Canadian Journey: An Odyssey into the Complex World of Bank Note Production

  Bank of Canada Review - Autumn 2007 Jill Moxley, Helen Meubus, Maura Brown

  For many years, the Bank of Canada successfully responded to occasional eruptions in counterfeiting by improving the security features on bank notes. The surge in counterfeiting that occurred while the Bank prepared to launch the Canadian Journey series, however, reflected increasingly rapid advances in computer technology that were changing the counterfeiting environment. The article describes these and other challenges that affected the new series and describes how the Bank developed a comprehensive new approach to its currency program and incorporated the valuable lessons it learned from these challenges. Designed to combat counterfeiting and meet the needs of the public, the new strategy includes increased research and development on new bank note security features, an intensified focus on retailer and public education, and a focus on law enforcement.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Bank notes, Central bank research
• June 17, 2007

  Trend Labour Supply in Canada: Implications of Demographic Shifts and the Increasing Labour Force Attachment of Women

  Bank of Canada Review - Summer 2007 Russell Barnett

  While demographic change has been an ongoing process in Canada, labour market implications of an aging population will become more acute in coming years. This article discusses the anticipated slowing in the growth of trend labour input over the coming decades with the aging of the baby boomers, declining fertility rates, and the stabilization of the labour force attachment of women. As the pool of labour shrinks, employers and governments will be looking for ways to address barriers to continued labour force participation and firms will have a greater incentive to find ways of improving labour productivity.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Labour markets, Potential output
• June 15, 2007

  Interpreting Canada's Productivity Performance in the Past Decade: Lessons from Recent Research

  Bank of Canada Review - Summer 2007 Richard Dion

  Dion examines the evolution of Canadian productivity since the mid-1990s, using the United States as a benchmark. During this period, trend productivity growth in Canada remained modest, whereas the U.S. witnessed a strong resurgence. Among the factors identified as potential root causes of Canada's lower productivity performance are a lower investment in information and communications technology, reallocation and adjustment costs associated with large relative price movements, and a weak demand for innovation.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Productivity, Recent economic and financial developments
• June 14, 2007

  Efficiency and Competition in Canadian Banking

  Bank of Canada Review - Summer 2007 Jason Allen, Walter Engert

  Allen and Engert report on recent research at the Bank of Canada on various aspects of efficiency in the Canadian banking industry. This research suggests that, overall, Canadian banks appear to be relatively efficient producers of financial services and they do not exercise monopoly or collusive-oligopoly power. The authors note the value of continuing to investigate opportunities to improve efficiency and competition in financial services in Canada.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Financial institutions, Financial system regulation and policies
• April 15, 2007

  Renewing the International Monetary Fund: A Review of the Issues

  Bank of Canada Review - Spring 2007 Danielle Lecavalier, Eric Santor

  Given the rapid and ongoing integration of the global economy, the International Monetary Fund needs to renew its role, governance structure, and functions if it is to maintain its relevance as the institution charged with promoting global financial stability. Lecavalier and Santor examine the areas of possible reform, including quota, voice, and representation; internal governance; surveillance; lending instruments; finances; and the Fund's role in low-income countries. They also review current Bank of Canada research that supports these reform efforts, including an integrated framework for IMF surveillance recently developed at the Bank.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): International topics