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This issue features a summary of the Bank’s annual conference, which took place in November 2011 and dealt with payments systems, and two articles that present research by Bank staff on global current account imbalances and macrofinancial risk assessment. The fourth article in this issue reviews the recent experience with inflation targeting.

Currency crises in the 1990s, especially those in emerging markets, have sharply disrupted economic activity, affecting not only the country experiencing the crisis, but also those with trade, investment, and geographic links. The authors review the theoretical literature and empirical evidence regarding these crises. They conclude that their primary cause is a fixed nominal exchange rate combined with macroeconomic imbalances, such as current account or fiscal deficits, that the market perceives as unsustainable at the prevailing real exchange rate. They also conclude that currency crises can be prevented through the adoption of sound monetary and fiscal policies, effective regulation and supervision of the financial sector, and a more flexible nominal exchange rate.

Cover page

Promissory Notes

The notes featured on the cover measure approximately 21 cm x 8 cm and form part of the National Currency Collection, Bank of Canada.

Photography by Gord Carter, Ottawa

Six months ago, at the time of the last Monetary Policy Report, the global economic and financial environment was volatile and highly uncertain because of the adverse situation in Asia and the fallout from the Russian debt moratorium.

This section of the Financial System Review examines the recent performance of the Canadian financial system and the factors, both domestic and international, that are influencing it. In each issue, one or more subjects of particular interest are discussed as highlighted topics.

First, I should explain what I mean by flexibility. As most of you are surely aware, the Bank of Canada has been openly discussing the importance of promoting policies that support economic efficiency, including financial system efficiency. Efficiency refers to the allocation of scarce economic resources to the most productive uses, in a cost-effective way.

The Canadian economy continues to grow at a solid pace, consistent with the Bank’s outlook in the January Monetary Policy Report Update.

The same is true of the Canadian economy, which must always adjust to changing domestic and world circumstances. During 2003 and so far this year, some of those adjustments may have felt more like overhauls, particularly for some manufacturing firms here in Ontario.

Examining the incentives for banks to hold various assets on their balance sheets for use as collateral when the opportunity cost of doing so can be high; an outline of the complexity inherent in any modern risk-management system and review of possible strategies to improve the performance of risk management; causes and consequences of the changing pace of labour reallocation in Canada; description of the structure and functioning of BoC-GEM— an adaptation of the Global Economy Model— with examples of its recent application.

The global economic recovery is under way, supported by continued improvements in fi nancial conditions and stronger domestic demand growth in many emerging-market economies.