Staff discussion papers

An objective function is a key component of a strategic portfolio management model used to determine the optimal allocations of assets and, possibly, their associated liabilities over some investment horizon.

Forecasts of global economic activity and inflation are important inputs when conducting monetary policy in small open economies such as Canada. As part of the Bank of Canada's broad agenda to augment its short-term forecasting tools, the author constructs simple mixed-frequency forecasting equations for quarterly global output, imports, and inflation using the monthly global Purchasing Managers Index (PMI).

The author evaluates the effect of the Bank of Canada's conditional commitment regarding the target overnight rate on longer-term market interest rates by taking into account the relationship between interest rates, inflation, and unemployment rates.

Relevant literature on asset-liability management (ALM) is reviewed and different ALM approaches are discussed that may be of interest to the Bank of Canada for the purpose of modelling the Exchange Fund Account (EFA).

ToTEM – the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy – is extended to include inventories. In the model, firms accumulate inventories of finished goods for their role in facilitating the demand for goods.

Inventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output – it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance.

While a number of central banks publish their own business conditions indicators that rely on non-random sampling, knowledge about their statistical accuracy has been limited.

The prices of commodities produced in Canada have important implications for the performance of the Canadian economy and the conduct of monetary policy. The authors explain an important change to the methodology used to construct the Bank of Canada commodity price index (BCPI).

In recent years, the Canadian economy has been affected by strong movements in relative prices brought about by the surging costs of energy and non-energy commodities, with significant implications for the terms of trade, the exchange rate, and the allocation of resources across Canadian sectors and regions.

The authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis.