April 14, 2007
Bank of Canada Review Article
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April 13, 2007
The Large-Value Payments System: Insights from Selected Bank of Canada Research
Given the Bank of Canada's strong interest in the safe and efficient operation of major clearing and settlement systems, the Bank maintains a rigorous research agenda as a means of informing payments system policy and oversight. In this article, Arjani and Engert review recent research undertaken by Bank staff concerning the risk and efficiency of the Large Value Transfer System (LVTS). Based on the findings from this research, the authors conclude that the design of the LVTS strikes an effective balance between risk and efficiency. The article also demonstrates the increased use of simulation analysis as a tool for conducting payments system research. A brief summary of the Bank's oversight strategy for systemically important payments systems is also provided. Goals for future research are noted as well, including modelling of participant behaviour and continued external collaboration with other researchers. -
December 23, 2006
Global Savings, Investment, and World Real Interest Rates
Over the past 25 years, world long-term interest rates have declined to levels not seen since the 1960s. This decline has been accompanied by falling world investment and savings rates. The authors explore global saving and investment outcomes that have led to the fall in the world real interest rate. The results show that the key factors explaining movements in savings and investment are variables that evolve relatively slowly over time, such as labour force growth and the age structure of the world economy. The conclusions suggest that, over the coming years, it is unlikely that these slowly changing variables will be a source of significant changes in world real interest rates. -
December 20, 2006
Why Monetary Policy Matters: A Canadian Perspective
This article provides answers to several key questions about Canadian monetary policy. First, what is monetary policy? Second, why does the Bank of Canada focus on the control of inflation rather than other macroeconomic variables? Third, how do the Bank's actions influence the rate of inflation? And, finally, how can monetary policy deliver genuine and significant benefits to society? -
December 18, 2006
A Summary of the Bank of Canada Conference on Fixed-Income Markets, 3–4 May 2006
The Bank of Canada's interest in fixed-income markets spans several of its functional areas of responsibility, including monetary policy, funds management, and financial system stability and efficiency. For that reason, the 2006 conference brought together top academics and central bankers from around the world to discuss leading-edge work in the field of fixed-income research. The papers and discussions cover such topics as the efficiency of fixed-income markets, price formation, the determinants of the yield curve, and volatility modelling. This article provides a short summary of each conference paper and the ensuing discussion. -
December 8, 2006
Perspectives on Productivity and Potential Output Growth: A Summary of the Joint Banque de France/Bank of Canada Workshop, 24–25 April 2006
A nation's productivity is the prime determinant of its real incomes and standard of living, as well as being a major determinant of its potential output. In the short run, deviations of actual output from potential output are a useful indicator of inflationary pressures. This article is a short summary of the proceedings of the workshop, which focus on productivity and potential output growth among industrialized countries. The research is organized under three main themes: estimating potential growth; productivity and growth; and institutions, policies, and growth. -
October 22, 2006
ToTEM: The Bank of Canada's New Projection and Policy-Analysis Model
The Terms-of-Trade Economic Model, or ToTEM, replaced the Quarterly Projection Model (QPM) in December 2005 as the Bank's principal projection and policy-analysis model for the Canadian economy. Benefiting from advances in economic modelling and computer power, ToTEM builds on the strengths of QPM, allowing for optimizing behaviour on the part of firms and households, both in and out of steady state, in a multi-product environment. The authors explain the motivation behind the development of ToTEM, provide an overview of the model and its calibration, and present several simulations to illustrate its key properties, concluding with some indications of how the model is expected to evolve going forward. -
October 20, 2006
MUSE: The Bank of Canada's New Projection Model of the U.S. Economy
Staff projections provided for the Bank of Canada's monetary policy decision process take into account the integration of Canada's very open economy within the global economy, as well as its close real and financial linkages with the United States. To provide inputs for this projection, the Bank has developed several models, including MUSE, NEUQ (the New European Quarterly Model), and BoC-GEM (Bank of Canada Global Economy Model), to analyze and forecast economic developments in the rest of the world. The authors focus on MUSE, the model currently used to describe interaction among the principal U.S. economic variables, including gross domestic product, inflation, interest rates, and the exchange rate. Brief descriptions are also provided of NEUQ and BoC-GEM. -
October 8, 2006
Modelling Financial Channels for Monetary Policy Analysis
The Bank of Canada considers a wide range of information and analysis before making a monetary policy decision and uses carefully articulated models to produce economic projections and to examine alternative scenarios. This article describes an ongoing research agenda at the Bank to develop models in which financial variables play an active role in the transmission of monetary policy actions to economic activity. Such models can help to analyze information from the financial side of the economy and to provide an overall view of the implications of financial developments for the current economic outlook. The authors also explain how this research can help address other issues relevant to the objectives of monetary policy, including how asset-price movements should be taken into account in the monetary policy framework. -
October 3, 2006
A New Effective Exchange Rate Index for the Canadian Dollar
An effective exchange rate is a measure of the value of a country's currency vis-à-vis the currencies of its most important trading partners. The Bank of Canada has created a new Canadian-dollar effective exchange rate index (CERI) to replace the C-6 index that it currently uses. The CERI uses multilateral trade weights published by the International Monetary Fund and includes the six currencies of countries or economic zones with the largest share of Canada's international trade. As such, it better reflects the recent changes in Canada's trade profile, including the rise in the importance of China and Mexico and the relative decline in importance of Europe and Japan in Canada's international trade. The author describes the methodology and construction of the new index and reviews the advantages it offers over the C-6, particularly the use of multilateral trade weights, the inclusion of trade in services, and the use of more recent trade data.