December 21, 2002
Publications
-
-
December 20, 2002
Transparency and the Response of Interest Rates to the Publication of Macroeconomic Data
The benefits of transparency—the outcome of the measures taken by the central bank to allow financial markets and economic agents to understand the factors it takes into account in formulating monetary policy—are now widely recognized. These benefits include smoother implementation of monetary policy and increased effectiveness as markets improve their ability to anticipate the Bank's policy decisions and account for them in their operations. How interest rates respond to the publication of macroeconomic data depends on the degree of transparency in monetary policy, as the rates will rise or fall as a reflection of the market's revised expectations. Before the Bank of Canada adopted initiatives to improve transparency, such as the inflation-control targets, the semi-annual publication of the Monetary Policy Report and Updates, and the fixed announcement dates, changes to the overnight rate created some volatility in interest rates, and publishing Canadian macroeconomic data did not appear to have a major impact on rates. This article shows how the Bank of Canada's steps towards greater transparency have increased the impact of Canadian data on short-term interest rates and have improved financial markets' understanding of how monetary policy decisions are taken. -
-
November 21, 2002
Is Canada Dollarized?
The sharp depreciation of the Canadian dollar and the successful launch of the euro have sparked a lively debate in Canada about the possible benefits of formally adopting the U.S. dollar as our national currency. Some observers have suggested that this debate is largely irrelevant, since Canada is already highly "dollarized." Canadian businesses and households, they assert, often use the U.S. dollar to perform standard money functions in preference to their own currency. Very little evidence has been provided, however, to support these claims. The authors review the available data with a view to drawing some tentative conclusions about the extent to which Canada has already been informally dollarized. The evidence suggests that many of the concerns that have been expressed about the imminent demise of the Canadian dollar have been misplaced. The Canadian dollar continues to be used as the principal unit of account, medium of exchange, and store of value within our borders. Moreover, there is no indication that dollarization is likely to take hold in the foreseeable future. Indeed, in many respects, the Canadian economy is less dollarized now than it was 20 years ago. -
November 21, 2002
Bank of Canada Review - Autumn 2002
Cover page
Business College Currency
The artifacts pictured on the cover form part of the National Currency Collection, Bank of Canada.
Photographed by Gord Carter, Ottawa
-
November 20, 2002
CLS Bank: Managing Foreign Exchange Settlement Risk
In the foreign exchange market, where average daily turnover is in trillions of dollars and trades span time zones, legal systems, and domestic payments systems, participants take on various risks. The most serious risk is credit risk—the risk that one party will fail to pay. Central banks, private sector financial institutions, and domestic payments systems operators laboured for more than a decade to develop a multi-currency settlement system to deal with these risks. The result, the CLS Bank, began operations in September 2002. It virtually eliminates the credit risk inherent in foreign exchange transactions by providing a payment-versus-payment arrangement for settlement. The CLS Bank is regulated by the Federal Reserve Board in consultation with the central banks that have currencies settling through its system. At present there are seven currencies, including the Canadian dollar. The Bank of Canada acts as banker for the CLS Bank, providing it with a settlement account and making and receiving payments on its behalf through the Large Value Transfer System. With the participation and support of the world's largest foreign-exchange-dealing institutions, and growing membership, the CLS Bank has the potential to become the dominant global mechanism for settling foreign exchange transactions. -
November 19, 2002
Purchasing-Power Parity: Definition, Measurement, and Interpretation
This article examines the concept of purchasing-power parity (PPP) and its implications for the equilibrium value of the Canadian exchange rate. PPP has two main applications, as a theory of exchange rate determination and as a means to compare living standards across countries. Concerning exchange rate determination, PPP is mainly useful as a reminder that monetary policy has no long-run impact on the real exchange rate, since the exchange rate can deviate persistently from its PPP value in response to real shocks. To compare living standards across countries, PPP exchange rates constructed by comparing the prices of national consumption baskets are used to translate per capita national incomes into a common currency. These rates are useful because they offset differences in national price levels to obtain comparable measures of purchasing power, but they are not an accurate measure of the equilibrium value of the exchange rate. The authors conclude that the current deviation of the Canadian exchange rate from the PPP rate does not imply that the exchange rate is undervalued, but that this deviation reflects the impact of persistent real factors, in particular, lower commodity prices. -
October 23, 2002
Monetary Policy Report – October 2002
Over the past year, Canada’s economy has outperformed the economies of virtually all the other major industrial countries. -
August 21, 2002
Monetary Policy and Uncertainty
Central banks must cope with considerable uncertainty about what will happen in the economy when formulating monetary policy. This article describes the different types of uncertainty that arise and looks at examples of uncertainty that the Bank has recently encountered. It then reviews the strategies employed by the Bank to deal with this problem. The other articles in this special issue focus on three of these major strategies. -
August 21, 2002
Bank of Canada Review - Summer 2002
Cover page
Welland Canal Note
The note, signed by Merritt as company president, measures 184 mm by 82 mm and forms part of the National Currency Collection, Bank of Canada.
Photography by James Zagon, Ottawa.