December 18, 2001 The Resolution of International Financial Crises: Private Finance and Public Funds Bank of Canada Review - Winter 2001–2002 Andy Haldane, Mark Kruger Over the past year and a half, authors Andy Haldane of the Bank of England and Mark Kruger of the Bank of Canada have been developing a framework for the resolution of international financial crises that aligns incentives for all parties in a way that deals with the crisis and preserves the integrity of the international financial system. The framework is built on principles, not rules. It attempts to be clear about the respective roles and responsibilities of the public and private sectors. A central element in shaping private sector expectations is knowledge that the official sector will behave predictably. Constraints on lending by the International Monetary Fund are a key step in that direction. They ensure that private sector involvement is a crucial part of crisis resolution, and they help encourage debtors and creditors to seek co-operative solutions to a crisis. Characterized by constraints, clarity, and orderliness, the framework has the potential to reduce the incidence and cost of financial crises. Content Type(s): Publications, Bank of Canada Review articles Topic(s): International topics
December 17, 2001 The Canadian Fixed-Income Market: Recent Developments and Outlook Bank of Canada Review - Winter 2001–2002 Éric Chouinard, Zahir Lalani The Canadian fixed-income market is in the midst of a structural transformation similar to those occurring in other national financial markets around the world. The authors examine recent developments and trends in the market and discuss their possible effects. The simultaneous shrinking of the federal government's financial requirements and steady rise in issues of corporate securities have significantly altered the composition of Canada's fixed-income market. Government of Canada securities constitute a predominant portion of outstanding fixed-income securities and play a pivotal role, serving as benchmarks for the valuation of other traded securities and as a hedging vehicle for market participants trying to control their exposure to risk. The reduced issuance of federal government securities has contributed to a decline in the liquidity of the benchmark market. This raises broader issues regarding the future of the Canadian fixed-income market, since the corporate market is still fairly underdeveloped and illiquid compared with that for Government of Canada issues. There are thus currently few benchmark and hedging alternatives. The federal government is, however, committed to preserving the integrity of the market for benchmark issues and is adopting initiatives to enhance market liquidity and alleviate some of the pressures on the effective supply of these securities. Another evolving trend in the market is the emergence of electronic trading platforms. These platforms have the potential to facilitate the price-discovery mechanism, increase cost efficiency, and improve the liquidity and transparency of the market. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Debt management, Financial markets
December 16, 2001 Risk Management in the Exchange Fund Account Bank of Canada Review - Winter 2001–2002 Michel Rochette In this article, author Michel Rochette of the Bank's Risk-Management Unit briefly describes the initiatives undertaken to identify, analyze, model, and manage the principal risks inherent in the transactions of the Exchange Fund Account (EFA), where the international reserves of the federal government are held. The author focuses on five types of risk: credit risk, market risk, liquidity risk, operational risk, and legal risk. In addition, the author presents the risk-management principles underlying the activities of the EFA and the governance structure of the Account. Content Type(s): Publications, Bank of Canada Review articles
November 18, 2001 A New Measure of Core Inflation Bank of Canada Review - Autumn 2001 Tiff Macklem While the Bank of Canada's inflation-control target is specified in terms of the rate of increase in the total consumer price index, the Bank uses a measure of trend or "core" inflation as a short-term guide for its monetary policy actions. When the inflation targets were renewed in May 2001, the Bank announced that it was adopting a new measure of core inflation. This measure excludes the eight most volatile components of the CPI and adjusts the remaining components for the effect of changes in indirect taxes. In this article, the author discusses the definition of the new measure of core inflation and describes some of its advantages relative to the previous measure. He notes that the new measure has a firmer statistical basis, has a better correspondence with economic theory, and does a better job of predicting future changes in overall inflation. While the new measure has these advantages, the Bank will continue to monitor a broad range of indicators when assessing the likely future path for inflation. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets
November 18, 2001 Bank of Canada Review - Autumn 2001 Cover page Coppers to Cents The notice measures 9 by 12 inches. It and the coins and tokens appearing on the cover form part of the National Currency Collection, Bank of Canada. Photography by James Zagon. Content Type(s): Publications, Bank of Canada Review
November 17, 2001 Predictability of Average Inflation over Long Time Horizons Bank of Canada Review - Autumn 2001 Allan Crawford Uncertainty about the level of future inflation adversely affects the economy because it distorts the savings and investment decisions of households and businesses. Since these decisions typically involve planning horizons of many years, the adverse effects from inflation uncertainty can be reduced by adopting a policy framework that makes future inflation more predictable over long time horizons. When the inflation-control target was renewed in May 2001, the agreement affirmed that monetary policy will be directed at moving inflation to the 2 per cent midpoint of the target range over a six-to-eight-quarter horizon. The author describes how this policy commitment increases the predictability of average inflation over periods longer than one year. This relationship is illustrated using the Canadian experience from the inflation-targeting period. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets
November 16, 2001 Factors Affecting Regional Economic Performance in Canada Bank of Canada Review - Autumn 2001 Brigid Brady, Farid Novin This article examines three shocks that affected Canada's economy over the past year from a regional perspective. The downturn in the U.S. economy, high energy prices, and low lumber prices affected Canada's regions to varying degrees. The relative size of the various economic sectors in each region is important in determining the intensity of a region's response to an economic shock. The article presents some stylized facts on the sectoral mix of each region followed by an analysis of the effects of the three shocks on the regional economies. An outlook is presented, which highlights the results of the survey by the Bank's regional offices in the summer of 2001. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Regional economic developments
November 15, 2001 Conference Summary: Revisiting the Case for Flexible Exchange Rates Bank of Canada Review - Autumn 2001 Lawrence L. Schembri This article summarizes the proceedings of an international research conference hosted by the Bank of Canada in November 2000. The conference marked the fiftieth anniversary of Canada's adoption of a flexible exchange rate, and its title recognizes the seminal contribution of Professor Milton Friedman's article "The Case for Flexible Exchange Rates." His keynote address to the conference is also summarized in the article. The conference papers re-examine many of the arguments raised by Friedman using recent developments in economic theory and econometric techniques. They investigate the experience of a wide range of industrialized and emerging-market economies. The main findings are that a strong case can be made for flexible exchange rates in economies that are large commodity exporters and that have credible low-inflation monetary policies and relatively well-developed financial systems. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes, Exchange rates
November 7, 2001 Monetary Policy Report – November 2001 Two major issues dominate the analysis and policy discussion in this Monetary Policy Report: the nature and extent of the global economic slowdown that began late last year and the consequences of the terrorist attacks in the United States. Content Type(s): Publications, Monetary Policy Report
August 17, 2001 The Changing Effects of Energy-Price Shocks on Economic Activity and Inflation Bank of Canada Review - Summer 2001 Gerald Stuber In this article the author examines the effects that major changes in energy prices in recent years have had on inflation and on the pace of economic expansion. These are then compared with the effects of the oil-price shocks that occurred in the 1970s and early 1980s. Changes in the intensity of energy use are examined, as well as developments in Canada's merchandise trade surplus in energy commodities and products. The author also considers the effects that a monetary policy anchored to low and stable inflation could have on price-setting behaviour and thus on the pass-through of higher energy costs to core inflation in Canada and in other industrial countries. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Business fluctuations and cycles