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Deputy Governor Toni Gravelle discusses the commodity price shock and its implications for the Canadian economy and monetary policy.

This paper attempts to reduce the uncertainty about the dynamics of the monetary transmission mechanism. Central to this attempt is the identification of monetary policy shocks. Recently, VAR approaches that use over-identifying restrictions have shown success in isolating such shocks.

Severe disruptions in the financial markets, as observed during the 2008 global financial crisis or the COVID-19 pandemic, can impair the stability of the entire financial system and worsen macroeconomic downturns.

Credit derivatives are a useful tool for lenders who want to reduce their exposure to a particular borrower but are unwilling to sell their claims on that borrower. Without actually transferring ownership of the underlying assets, these contracts transfer risk from one counterparty to another. Commercial banks are the major participants in this growing market, using these transactions to diversify their portfolios of loans and other risky assets. The authors examine the size and workings of this relatively new market and discuss the potential of these transactions for distorting existing incentives for risk management and risk monitoring.

When giving a speech near the end of a year, it is common practice to look back over the past 12 months, consider what we have learned from the events and experiences of the year, and think a bit about what might lie ahead. I became Governor of the Bank of Canada in 2001 and, since that time, I have found myself saying at the end of each year, "Well, we won't see another year like that again."

This special issue, “Real-Financial Linkages,” examines the Bank’s research using theoretical and empirical models to improve its understanding of the linkages between financial and macroeconomic developments in the wake of the recent global financial crisis.

Although the standard of living of Canadians has improved as a result of terms-of-trade gains created by the sharp rise in real commodity prices over the past five years or so, the commodity-price increase, combined with an exchange rate appreciation and real income gain, triggered structural adjustments by altering underlying economic incentives. The frictions generated in adjusting to the relative price shock have likely contributed to hold back aggregate productivity growth. Dupuis and Marcil examine the structural adjustments that have been required-in particular, the resource reallocation among the different sectors of the economy-and its effects on employment, output, and productivity, as well as the responses of final domestic demand and external trade flows.

We analyze micro-level data from the Canadian Survey of Consumer Expectations through the lens of a heterogeneous-expectations model to study how inflation expectations form over the business cycle. We provide new insights into how households form expectations, documenting that forecasting behaviours, attention and noise in beliefs vary across socio-demographic groups and correlate with views about monetary policy.

The level of government debt in Canada relative to gross domestic product has risen steadily since the mid-1970s. Canada has not been alone in experiencing rising government indebtedness, but in comparison to other countries, Canada's debt load is now distinctly on the high side. The author reviews some of the effects of rising government debt levels on macroeconomic performance and provides some calculations aimed at illustrating their possible long-run impact on the Canadian economy. His analysis, which is based on a model of the Canadian economy used at the Bank of Canada, suggests that higher levels of government debt reduce both the level of output and the share of output that is available for domestic consumption. The central policy implication is that there are substantial benefits to halting the rise in government debt and thus preventing further erosion of consumption opportunities.