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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.

One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output.

The authors describe the principal results obtained from a new method applied to the estimation of potential U.S. GDP.

This paper reviews both the theoretical and empirical literature on the impact of common currencies on financial markets and evaluates the first three years of experience with Economic and Monetary Union (EMU).

This paper examines the daily hedging and risk-management practices of financial intermediaries in the Canadian foreign exchange (FX) market.

This paper examines the factors that lead liquidity-motivated investors to choose the type of market structure they prefer.

We develop an equilibrium model of the monetary policy transmission mechanism that highlights information frictions in the market for money and search frictions in the market for labour.

In this paper, we study the impact of supply shocks on the Canadian real exchange rate. We specify a structural vector-error-correction model that links the real exchange rate to different fundamentals.

Various measures indicate that inflation expectations evolve sluggishly relative to actual inflation. In addition, they often fail conventional tests of unbiasedness.

This paper continues the work started by Bolder and Stréliski (1999) and considers two alternative classes of models for extracting zero-coupon and forward rates from a set of observed Government of Canada bond and treasury-bill prices.