Staff analytical notes

• The neutral rate in Canada: 2020 update

  Staff Analytical Note 2020-24 Dmitry Matveev, Julien McDonald-Guimond, Rodrigo Sekkel

  The neutral rate of interest is important for central banks because it helps measure the stance of monetary policy. We present updated estimates of the neutral rate in Canada using the most recent data. We expect the COVID-19 pandemic to significantly affect the fundamental drivers of the Canadian neutral rate.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Economic models, Interest rates, Monetary policy JEL Code(s): E, E4, E40, E43, E5, E50, E52, E58, F, F4, F41

• Announcing the Bankers’ Acceptance Purchase Facility: a COVID‑19 event study

  Staff Analytical Note 2020-23 Rohan Arora, Sermin Gungor, Kaetlynd McRae, Jonathan Witmer

  The Bank of Canada launched the Bankers’ Acceptance Purchase Facility (BAPF) to ensure that the bankers’ acceptance (BA) market could continue to function well during the financial crisis induced by the COVID‑19 pandemic. We review the impact that the announcement of this facility had on BA yields in the secondary market. We find that BA yield spreads declined by 15 basis points on the day of the announcement and by up to 70 basis points over a longer period. Using an econometric framework, we quantify the effect of the announcement and confirm early assertions presented in the Bank’s 2020 Financial System Review.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Canadian stock market since COVID‑19: Why a V-shaped price recovery?

  Staff Analytical Note 2020-22 Jean-Sébastien Fontaine, Guillaume Ouellet Leblanc, Ryan Shotlander

  Between February 19 and March 23, 2020, the Canadian stock market plunged due to the severe economic impact of COVID-19. By the end of the summer, the stock market had already recovered a significant portion of its losses, leaving many asking if investors see the economy through rose-coloured glasses. Despite these concerns, we find that current market valuations for companies on the Toronto Stock Exchange align well, on average, with the declines in earning forecasts observed since the start of the year. We also find these market valuations are consistent with the discount rate returning to its pre-pandemic level.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Coronavirus disease (COVID-19), Financial markets JEL Code(s): G, G1, G12, G14

• Security and convenience of a central bank digital currency

  Staff Analytical Note 2020-21 Charles M. Kahn, Francisco Rivadeneyra

  An anonymous token-based central bank digital currency (CBDC) would pose certain security risks to users. These risks arise from how balances are aggregated, from their transactional use and from the competition between suppliers of aggregation solutions.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Central bank research, Digital currencies and fintech, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): E, E4, E42, G, G2, G21

• What do high-frequency expenditure network data reveal about spending and inflation during COVID‑19?

  Staff Analytical Note 2020-20 Kim Huynh, Helen Lao, Patrick Sabourin, Angelika Welte

  The official consumer price index (CPI) inflation measure, based on a fixed basket set before the COVID 19 pandemic, may not fully reflect what consumers are currently experiencing. We partnered with Statistics Canada to construct a more representative index for the pandemic with weights based on real-time transaction and survey data.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Inflation and prices, Payment clearing and settlement systems JEL Code(s): D, D1, D12, E, E3, E31, E4, E42, E5, E52

• The Canadian corporate investment gap

  Staff Analytical Note 2020-19 Chris D'Souza, Timothy Grieder, Daniel Hyun, Jonathan Witmer

  Business investment has been lower than expected in Canada and abroad since the financial crisis of 2007–09. This corporate investment gap is mirrored in firms’ other financing decisions, as they have increased cash holdings and dividend payments and decreased issuance of debt and equity.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Firm dynamics, Monetary policy transmission JEL Code(s): D, D2, D22, D9, D92, G, G3, G31, G32

• What COVID-19 revealed about the resilience of bond funds

  Staff Analytical Note 2020-18 Guillaume Ouellet Leblanc, Ryan Shotlander

  The liquidity management strategies of fund managers, supported by policy measures, have helped bond funds limit the increase in redemptions caused by COVID 19. This avoided further deterioration in liquidity in bond markets. Nevertheless, these funds were left with lower cash buffers, which could make them more vulnerable to additional large redemptions.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability JEL Code(s): G, G1, G2, G20, G23

• Is the stock market pricing in a V‑shaped recovery?

  Staff Analytical Note 2020-17 James Kyeong

  Major stock indexes have bounced back from their March 23 trough to about 10 percent below their peaks. However, stocks that are more sensitive to the business cycle have not performed as well during this market rally. This suggests that stock markets are pricing in a slower, shallower economic recovery.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Asset pricing, Financial markets JEL Code(s): E, E4, E44, G, G1, G12, G14

• Will exchange-traded funds shape the future of bond dealing?

  Staff Analytical Note 2020-16 Rohan Arora, Jean-Sébastien Fontaine, Corey Garriott, Guillaume Ouellet Leblanc

  Bond dealers have traditionally kept bonds in an inventory until clients buy them. But now, dealers have another way to access bonds for their clients: the exchange-traded fund. We discuss this new way to manage bond dealing and what it might mean for bond markets.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Financial stability, Market structure and pricing JEL Code(s): G, G1, G2, G20, G23

• The potential effect of a central bank digital currency on deposit funding in Canada

  Staff Analytical Note 2020-15 Alejandro García, Bena Lands, Xuezhi Liu, Joshua Slive

  A retail central bank digital currency denominated in Canadian dollars could, in theory, create competition for bank deposit funding.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Digital currencies and fintech, Financial institutions, Financial stability JEL Code(s): E, E4, E41, E44, E5, G, G1, G10, G17, G2, G21, G3, G32, O