E4 - Money and Interest Rates

• Finding the balance—measuring risks to inflation and to GDP growth

  Staff Analytical Note 2023-18 Bruno Feunou, James Kyeong

  Using our new quantitative tool, we show how the risks to the inflation and growth outlooks have evolved over the course of 2023.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Business fluctuations and cycles, Econometric and statistical methods JEL Code(s): C, C3, C32, C5, C58, E, E4, E44, G, G1, G17

• Making It Real: Bringing Research Models into Central Bank Projections

  Staff Discussion Paper 2023-29 Marc-André Gosselin, Sharon Kozicki

  Macroeconomic projections and risk analyses play an important role in guiding monetary policy decisions. Models are integral to this process. This paper discusses how the Bank of Canada brings research models and lessons learned from those models into the central bank projection environment.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Economic models, Monetary policy JEL Code(s): C, C3, C32, C5, C51, E, E3, E37, E4, E47, E5, E52

• Estimating the Appropriate Quantity of Settlement Balances in a Floor System

  Staff Discussion Paper 2023-26 Narayan Bulusu, Matthew McNeely, Kaetlynd McRae, Jonathan Witmer

  This paper presents two complementary approaches to estimating the appropriate quantity of settlement balances needed to effectively operate monetary policy under a floor system in Canada.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Financial institutions, Financial markets, Financial system regulation and policies, Monetary policy implementation, Payment clearing and settlement systems JEL Code(s): E, E4, E41, E42, E5, E52, E58, G, G2, G21, G28

• Three things we learned about the Lynx payment system

  Staff Analytical Note 2023-14 Nikil Chande, Zhentong Lu, Hiru Rodrigo, Phoebe Tian

  Canada transitioned to a new wholesale payment system, Lynx, in August 2021. Lynx is based on a real-time settlement model that eliminates credit risk in the system. This model can require more liquidity; however, Lynx’s design allows Canada’s wholesale payments to settle efficiently.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial services, Financial system regulation and policies, Payment clearing and settlement systems JEL Code(s): C, C1, C10, E, E4, E42, G, G2, G28

• Redefining Financial Inclusion for a Digital Age: Implications for a Central Bank Digital Currency

  Staff Discussion Paper 2023-22 Alexandra Sutton-Lalani, Sebastian Hernandez, John Miedema, Jiamin Dai, Badr Omrane

  We explore quantitative and qualitative information about Canadians who face barriers to making digital payments. We also consider the implications of ongoing digitalization for modern financial inclusion and a potential central bank digital currency.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Accessibility, Bank notes, Central bank research, Digital currencies and fintech, Digitalization, Financial services JEL Code(s): A, A1, A14, E, E4, E42, E5, E50, I, I3, I31, O, O3, O33, O5, O51

• Anonymous Credentials: Secret-Free and Quantum-Safe

  Staff Working Paper 2023-50 Raza Ali Kazmi, Cyrus Minwalla

  An anonymous credential mechanism is a set of protocols that allows users to obtain credentials from an organization and demonstrate ownership of these credentials without compromising users’ privacy. In this work, we construct the first secret-free and quantum-safe credential mechanism.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Digital currencies and fintech, Payment clearing and settlement systems JEL Code(s): E, E4, E42, G, G2, G21, O, O3, O31

• Should Banks Be Worried About Dividend Restrictions?

  Staff Working Paper 2023-49 Josef Schroth

  A regulator would want to restrict dividends to force banks to rebuild capital during a crisis. But such a policy is not time-consistent. A time-consistent policy would let banks gradually rebuild capital and pay dividends even when their equity remains below pre-crisis levels.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Credit and credit aggregates, Credit risk management, Financial stability, Financial system regulation and policies, Lender of last resort JEL Code(s): E, E1, E13, E3, E32, E4, E44

• Tattle-tails: Gauging downside risks using option prices

  Staff Analytical Note 2023-13 Greg Adams, Maksym Tupis

  Options markets offer unique insights into the changing risks different assets face, which helps us better understand the broader risks to the Canadian economy. We show how option prices help reveal that investors did not anticipate large downside risks to either major Canadian banks or economic growth during the March 2023 financial sector system stress, a period when policy-makers and investors were unsure of what the future held for Canada’s economy.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial markets, Monetary policy and uncertainty, Recent economic and financial developments JEL Code(s): E, E4, E44, E5, E52

• Forecasting Risks to the Canadian Economic Outlook at a Daily Frequency

  Staff Discussion Paper 2023-19 Chinara Azizova, Bruno Feunou, James Kyeong

  This paper quantifies tail risks in the outlooks for Canadian inflation and real GDP growth by estimating their conditional distributions at a daily frequency. We show that the tail risk probabilities derived from the conditional distributions accurately reflect realized outcomes during the sample period from 2002 to 2022.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Business fluctuations and cycles, Econometric and statistical methods JEL Code(s): C, C3, C32, C5, C58, E, E4, E44, G, G1, G17

• A Behavioral New Keynesian Model of a Small Open Economy Under Limited Foresight

  Staff Working Paper 2023-44 Seunghoon Na, Yinxi Xie

  This paper studies exchange rate dynamics by incorporating bounded rationality, that is, limited foresight, in a small open-economy model. This behavior of limited foresight helps explain several observations and puzzles in the data of exchange rate movements.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Exchange rates, International topics, Monetary policy transmission JEL Code(s): E, E4, E43, E7, E70, F, F3, F31, F4, F41