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This study has two aspects. First, the author examines the theoretical properties of the constant elasticity of substitution (CES) production function and the implications of this formulation for the properties of a structural macroeconomic model.

The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities.

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.

Remarks by Paul Jenkins, Senior Deputy Governor, Bank of Canada, to the FMAC/FMA-USA Joint Conference 2004

This study on overinvestment differs from the existing literature in that investment in machinery and equipment is modelled as a structural vector autoregression with identification achieved by imposing long-run restrictions, as in Blanchard and Quah (1989).

The authors study the price - volume dynamics ahead of the first public announcement of a takeover for 420 Canadian firms from 1985 to 2002.

The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.

Remarks by David Longworth, Deputy Governor of the Bank of Canada to the Canadian Association for Business Economics

The authors model trading by foreign and domestic investors in developed-country equity markets.

The authors conduct a counterfactual simulation of the proposed rules under the new Basel Capital Accord (Basel II), including the revised treatment of expected and unexpected credit losses proposed by the Basel Committee in October 2003.