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Bank of Canada Review Article



  • April 22, 2005

    Borders, Common Currencies, Trade, and Welfare: What Can We Learn from the Evidence?

    Bank of Canada Review - Spring 2005 John F. Helliwell, Lawrence L. Schembri
    Recent evidence indicates that the intensity of economic exchange within and across borders is significantly different: linkages are much tighter within, than among, nation-states. These findings, however, do not necessarily imply that borders and separate national currencies represent significant barriers to trade that should be removed, since the evidence is also consistent with the alternative hypothesis, that domestic exchange is more efficient because domestic producers are better able to satisfy the requirements of local consumers, owing to common tastes and institutions and the existence of local information and social networks. Focusing primarily on trade linkages within and between Canada and the United States, the authors review the evidence on the extent to which national borders lessen the intensity of international economic linkages, primarily trade in goods and services, and the effects on domestic welfare. They also examine the evidence on the impact of common currencies on trade and welfare. They determine that, since the empirical models employed to date in this research cannot distinguish between alternative explanations of the evidence, it is not yet possible to draw firm conclusions for policy-making.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes, International topics, Monetary policy framework
  • April 20, 2005

    Conference Summary: Canada in the Global Economy

    Bank of Canada Review - Spring 2005 Lawrence L. Schembri
    The Bank of Canada's 2004 research conference examined the real and financial linkages between the Canadian economy and the economies in the rest of the world. Although Canada has profited enormously from its openness to international trade in goods, services, and financial assets, many of the most significant shocks to the Canadian economy in recent years have come from abroad. For these reasons, understanding the extent and nature of the external linkages, their implications for the Canadian economy, and the process by which the Canadian economy adjusts to external shocks is of critical importance both for monetary policy and for monitoring the financial system. This article describes the purpose of the conference—to deepen economists' understanding of these important issues—and provides highlights of the papers presented in each of the five sessions, as well as summaries of the keynote lecture and the discussion of the policy panel.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Balance of payments and components, Exchange rates, International topics
  • December 25, 2004

    The Bank of Canada as Lender of Last Resort

    Bank of Canada Review - Winter 2004-2005 Fred Daniel, Walter Engert, Dinah Maclean
    As the ultimate provider of Canadian-dollar liquidity to the financial system, the Bank of Canada has the unique capacity to create Canadian-dollar claims on the central bank and the power to make secured loans or advances to chartered banks and other members of the Canadian Payments Association. The Bank supplies overnight credit on a routine basis through the Standing Liquidity Facility (SLF) to direct participants in the Large Value Transfer System, and Emergency Lending Assistance (ELA) to solvent deposit-taking institutions that require more substantial and prolonged credit. The authors review the policy framework that guides the Bank's lender-of-last-resort function, including the key issues, terms and conditions, and eligibility criteria associated with its SLF and ELA activities. Also discussed are foreign currency ELA, the relationship between SLF and ELA, systemic risk and Bank of Canada intervention, and the potential provision of liquidity to major clearing and settlement systems.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial stability, Lender of last resort, Payment clearing and settlement systems
  • December 24, 2004

    Government of Canada Yield-Curve Dynamics, 1986-2003

    Bank of Canada Review - Winter 2004-2005 Grahame Johnson
    A database of historical Government of Canada zero-coupon yield curves developed at the Bank of Canada is introduced in this article, which also includes an initial statistical analysis of the behaviour and evolution of the zero-coupon interest (spot) rates over the full period and two distinct subperiods. Specific areas of interest include the evolution of the levels of key interest rates and yield-curve measures over the sample as well as daily changes in the key interest rates and the yield-curve measures; the identification of a relatively small number of factors that drove the evolution of the yield curve; and the total returns that would have been realized by holding bonds of different maturities for a given holding period.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Debt management, Econometric and statistical methods, Financial markets
  • December 23, 2004

    A Survey of the Price-Setting Behaviour of Canadian Companies

    Bank of Canada Review - Winter 2004-2005 David Amirault, Carolyn Kwan, Gordon Wilkinson
    To better understand price-setting behaviour in the Canadian economy, the Bank of Canada's regional offices surveyed a representative sample of 170 firms between July 2002 and March 2003. The authors discuss the reasons behind the survey, the methodology used to develop the questionnaire and conduct the interviews, and summarize the results. The study also assessed several explanations for holding prices steady despite market pressures for a change. The survey findings indicate that prices in Canada are relatively flexible and have become more flexible over the past decade. Price stickiness was generally found to originate in firms' fears of antagonizing customers or disturbing the goodwill or reputation developed with them. A detailed discussion of the results includes a consideration of their implications for monetary policy.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Monetary policy transmission
  • November 24, 2004

    Asset Prices and Monetary Policy: A Canadian Perspective on the Issues

    Bank of Canada Review - Autumn 2004 Jack Selody, Carolyn A. Wilkins
    The issue addressed in this article is the extent to which monetary policy in Canada should respond to asset-price bubbles. The article concludes that maintaining low and stable consumer price inflation is the best contribution that monetary policy can make to promoting economic and financial stability, even when the economy experiences asset-price bubbles. In extreme circumstances—when an asset-price bubble is well identified and likely to have significant costs to the economy when it bursts—monetary policy might better maintain low and stable consumer price inflation by leaning against a particular bubble even though it may mean that inflation deviates temporarily from its target. Such a strategy might reduce the risk that a crash in asset prices could lead to a recession and to inflation markedly below target in the longer run. The circumstances where this strategy is possible will be rare because economists are far from being able to determine consistently and reliably when leaning against a particular bubble is likely to do more harm than good. Housing-price bubbles should be a greater concern for Canadian monetary policy than equity-price bubbles, since rising housing prices are more likely to reflect excessively easy domestic credit conditions than are equity prices, which are largely determined in global markets.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets, Monetary and financial indicators, Monetary policy framework
  • November 23, 2004

    Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting

    Bank of Canada Review - Autumn 2004 Christopher Reid, Frédéric Dion, Ian Christensen
    The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Interest rates, Market structure and pricing
  • November 22, 2004

    The Evolving Financial System and Public Policy: Conference Highlights and Lessons

    Bank of Canada Review - Autumn 2004 Pierre St-Amant, Carolyn A. Wilkins
    At the 12th annual Bank of Canada economic conference, held in Ottawa on 4 and 5 December 2003, representatives from various public and private organizations and Bank of Canada staff discussed papers presented on three key issues affecting the financial system: financial contagion, the implications of bank diversification, and financial sector regulation. Papers on financial contagion studied the effect of globalization on Canadian foreign-asset exposures, developed a general-equilibrium model of a competitive interfirm lending market in which firms can borrow or lend, and used market-based indicators to determine the probability that contagion can be generated by interbank exposures. The papers on bank diversification focused on the links between the changing behaviour of financial institutions and risk-return trade-offs. Issues of financial sector regulation included the relationship between governance and financial sector soundness, the theoretical basis of bank regulations for capital requirements, and the implications of bank capital requirements for the transmission of monetary policy. A panel discussion provided extended discussion of the conference papers.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial markets, Financial services
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