November 17, 2016
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
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November 17, 2016
Reinventing the Role of Central Banks in Financial Stability
Central banks contribute importantly to the promotion of financial stability given their sys-tem-wide macro-financial perspective and existing roles as lender of last resort and overseer of systemic payment systems. Since the global financial crisis, the financial system role of central banks has expanded to place more emphasis on the prevention of financial stress and crises. Central banks work with other responsible authorities to enhance financial system resilience and to assess and mitigate financial vulnerabilities and systemic risk. -
Managing Risk Taking with Interest Rate Policy and Macroprudential Regulations
We develop a model in which a financial intermediary’s investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance and characterize the policy tools that implement efficient risk taking. -
Fragility of Resale Markets for Securitized Assets and Policy of Asset Purchases
Markets for securitized assets were characterized by high liquidity prior to the recent financial crisis and by a sudden market dry-up at the onset of the crisis. A general equilibrium model with heterogeneous investment opportunities and information frictions predicts that, in boom periods or mild recessions, the degree of adverse selection in resale markets for securitized assets is limited because of the reputation-based guarantees by asset originators. -
The Paul Storer Memorial Lecture—Cross-Border Trade Integration and Monetary Policy
In this paper we explore the nexus between cross-border trade integration and monetary policy. We first review the evidence that trade liberalization has increased the degree of integration in North America and conclude that, while robust structural inferences remain elusive, there is sufficient supporting evidence for central banks to treat the issue seriously. -
On What States Do Prices Depend? Answers from Ecuador
In this paper, we argue that differences in the cost structures across sectors play an important role in firms’ decisions to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers. -
A Primer on Neo-Fisherian Economics
Conventional models imply that central banks aiming to raise inflation should lower nominal rates and thus stimulate aggregate demand. However, several economists have recently challenged this conventional wisdom in favour of an alternative “neo-Fisherian’’ view under which higher nominal rates might in fact lead to higher inflation. -
On the Value of Virtual Currencies
This paper develops an economic framework to analyze the exchange rate of virtual currency. Three components are important: first, the current use of virtual currency to make payments; second, the decision of forward-looking investors to buy virtual currency (thereby effectively regulating its supply); and third, the elements that jointly drive future consumer adoption and merchant acceptance of virtual currency. -
Leaning Within a Flexible Inflation-Targeting Framework: Review of Costs and Benefits
This note examines the merits of monetary policy adjustments in response to financial stability concerns, taking into account changes in the state of knowledge since the renewal of the inflation-targeting agreement in 2011. A key financial system vulnerability in Canada is elevated household indebtedness: as more and more households are nearing their debt-capacity limits, the likelihood and severity of a large negative correction in housing markets are also increasing. -
The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies
This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders.