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June 22, 2005

Estimating the Impact of Monetary Policy Surprises on Fixed-Income Markets

In the interest of better understanding the impact of the Bank of Canada's policy actions on bond and bill yields, Andreou assesses the impact of policy-rate announcements on short and long bonds over the period 1996 to 2004. To aid the analysis, policy actions are decomposed into expected and surprise components. He also examines whether the introduction of fixed announcement dates (FADs) has affected these results, including markets' perceptions. The main finding is that unexpected policy actions by the Bank have a significant effect on market rates at the shorter end of the yield curve, with the effect dissipating as the maturity increases. A second finding, that the impact on longer-term interest rates of a surprise action by the Bank has diminished since the introduction of the FADs, suggests that the Bank's long-term policy goals are well understood and credible.
June 18, 2005

Recent Trends in Canadian Defined-Benefit Pension Sector Investment and Risk Management

Defined-benefit (DB) pension plans account for the majority of employer pension fund assets. In recent years, a number of DB plans have become underfunded, in sharp contrast to the 1990s, when many plans had large actuarial surpluses. The deterioration in the financial health of DB plans has underscored various longer-term structural issues that could make it increasingly difficult for plan sponsors to manage the financial risks of these plans. Tuer and Woodman examine how funding deficits, a greater focus on plan liabilities, a low yield environment, and changing investment beliefs are influencing investment decisions in the Canadian DB pension sector. They review the funding of DB plans, changing views on the equity-risk premium, and the shift towards liability-centred approaches to investment and how these developments are affecting pension sector investment. They also consider additional influences on the pension sector, including the limited supply of long-term bonds, the elimination of the foreign-property rule, and the movement towards fair-value accounting and a financial-economics approach to actuarial valuation, as well as their implications for financial markets.
April 25, 2005

Understanding China's Long-Run Growth Process and Its Implications for Canada

In the past 25 years, China has introduced numerous reforms, gradually moving from a centrally planned economy towards a socialist market economy capable of robust and sustainable economic growth. China's increasing integration into the global economy, which has been fuelled by this recent and rapid economic growth, has already begun to affect the economies of other countries and to present challenges for policy-makers, both in China and abroad. In addition to examining the determinants of China's past and current growth, the authors consider factors that are likely to support continued growth in the future and assess the implications for both the world and the Canadian economies.
April 22, 2005

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

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.
April 20, 2005

Conference Summary: Canada in the Global Economy

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.
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