March 31, 2023 Quarterly Research Update – 2023 Q1 This newsletter features the latest research publications by Bank of Canada economists including external publications and working papers published on the Bank of Canada’s website. Content Type(s): Staff research, Research newsletters
A Review of the Bank of Canada’s Market Operations Related to COVID-19 Staff discussion paper 2023-6 Grahame Johnson This paper reviews the range of extraordinary programs launched by the Bank of Canada in response to the pandemic-related financial market disruption. It provides some recommendations for future interventions to ensure the programs are appropriately structured for the financial and economic stresses they are intended to address. Content Type(s): Staff research, Staff discussion papers JEL Code(s): D, D4, D47, E, E4, E41, E5, G, G0, G01, G1, G14, G2, G21, G23, H, H1, H12 Research Theme(s): Financial markets and funds management, Market functioning, Financial system, Financial stability and systemic risk, Monetary policy, Monetary policy tools and implementation
Persistent Debt and Business Cycles in an Economy with Production Heterogeneity Staff working paper 2023-17 Aubhik Khan, Soyoung Lee We examine the role of debt in amplifying and propagating recessions. Firms’ debt adjustment makes recessions deeper but makes expansions gradual. In particular, when the aggregate business leverage is ten percentage points above average, the half-life of the recovery doubles. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E23, E3, E30, E32 Research Theme(s): Financial system, Financial stability and systemic risk, Household and business credit, Monetary policy, Real economy and forecasting
Cost Pass-Through with Capacity Constraints and International Linkages Staff working paper 2023-16 Reinhard Ellwanger, Hinnerk Gnutzmann, Piotr Śpiewanowski How are regional cost shocks passed through into global prices? We investigate the role of short-run capacity constraints and show that they can induce stark non-linearities in the pass-through. We highlight this effect for the market for ammonia, a commodity produced largely from natural gas. Content Type(s): Staff research, Staff working papers JEL Code(s): L, L1, L13, L6, L65, Q, Q4, Q40, Q5, Q54 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Structural challenges, Climate change, International trade, finance and competitiveness
We Didn’t Start the Fire: Effects of a Natural Disaster on Consumers’ Financial Distress Staff working paper 2023-15 Anson T. Y. Ho, Kim Huynh, David T. Jacho-Chávez, Geneviève Vallée We use detailed consumer credit data to investigate the impact of the 2016 Fort McMurray wildfire, the costliest wildfire disaster in Canadian history, on consumers’ financial stress. We focus on the arrears of insured mortgages because of their important implications for financial institutions and insurers’ business risk and relevant management practices. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C2, C21, D, D1, D12, G, G2, G21, Q, Q5, Q54 Research Theme(s): Financial system, Financial stability and systemic risk, Household and business credit, Structural challenges, Climate change
Firms’ inflation expectations and price-setting behaviour in Canada: Evidence from a business survey Staff analytical note 2023-3 Ramisha Asghar, James Fudurich, Jane Voll Canadian firms’ expectations for high inflation may be influencing their price setting, supporting strong price growth and delays in the transmission of monetary policy. Using data from the Business Outlook Survey, we investigate the reasons behind widespread price growth seen in Canada in 2021 and early 2022. Content Type(s): Staff research, Staff analytical notes JEL Code(s): D, D2, D22, E, E3, E31 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Real economy and forecasting
A central bank digital currency for offline payments Staff analytical note 2023-2 Cyrus Minwalla, John Miedema, Sebastian Hernandez, Alexandra Sutton-Lalani Offline functionality is a key consideration for a potential CBDC. We describe the different types of offline functionality based on their duration outside of network connection—either intermittent (for short periods) or extended (for longer periods). We discuss the advantages and drawbacks of each and consider implications for end-user devices, system resilience and universal accessibility. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E4, E42, E5, E51, E58, O, O3, O31 Research Theme(s): Money and payments, Digital assets and fintech, Payment and financial market infrastructures, Retail payments
On the Fragility of DeFi Lending Staff working paper 2023-14 Jonathan Chiu, Emre Ozdenoren, Kathy Yuan, Shengxing Zhang We develop a dynamic model to capture key features of decentralized finance lending. We identify a price-liquidity feedback: the market outcome in any given period depends on agents' expectations about lending activities in future periods, with higher future price expectations leading to more lending and higher prices in that period. Content Type(s): Staff research, Staff working papers JEL Code(s): G, G0, G01, G1, G10 Research Theme(s): Financial system, Financial stability and systemic risk, Money and payments, Digital assets and fintech
The Canadian Neutral Rate of Interest through the Lens of an Overlapping-Generations Model Staff discussion paper 2023-5 Martin Kuncl, Dmitry Matveev We use a small open economy model with overlapping generations to evaluate secular dynamics of the neutral rate in Canada from 1980 to 2018. We find that changes in both foreign and domestic factors resulted in a protracted decline in the neutral rate. Content Type(s): Staff research, Staff discussion papers JEL Code(s): E, E2, E21, E22, E4, E43, E5, E50, E52, E58, F, F4, F41 Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Structural challenges, Demographics and labour supply
Learning in a Complex World: Insights from an OLG Lab Experiment Staff working paper 2023-13 Cars Hommes, Stefanie J. Huber, Daria Minina, Isabelle Salle This paper brings novel insights into group coordination and price dynamics in complex environments. We implement a chaotic overlapping-generation model in the lab and find that group coordination is always on the steady state or on the two-cycle and that behavior is non-monotonic. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C6, C62, C68, C9, C91, C92, E, E1, E13, E7, E70, G, G1, G12, G4, G41 Research Theme(s): Models and tools, Economic models, Monetary policy, Real economy and forecasting