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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.

While greater global financial integration is beneficial, the authors discuss how foreign capital inflows can also facilitate the buildup of domestic vulnerabilities and potentially lead to destabilizing reversals. Canada’s current international investment position is typical of advanced economies and will likely continue to act as an economic stabilizer. However, the growth and composition of Canada’s international investment position warrant continued monitoring.

This paper proposes a theoretical framework to analyze the relationship between credit shocks, firm defaults and volatility, and to study the impact of credit shocks on business cycle dynamics.

The authors document the out-of-sample forecasting accuracy of the New Keynesian model for Canada.

The analysis and forecasting of developments in the U.S. economy have always played a critical role in the formulation of Canadian economic and financial policy. Thus, the Bank places considerable importance on generating internal forecasts of U.S. economic activity as an input to the Canadian projection.

Building on an earlier Review article, the authors critically reassess the premise that exchange rate pass-through (ERPT) has declined in light of recent studies of the issue in the context of a dynamic stochastic general-equilibrium framework.

Repeated interactions between borrowers and lenders create the possibility of dynamic pricing: lenders compete aggressively with low prices to attract new borrowers and then raise their prices once borrowers have made a commitment. We find such pricing patterns in the Canadian mortgage market.

The authors compute welfare-maximizing Taylor rules in a dynamic general-equilibrium model of a small open economy.

The Reports section of the Financial System Review examines selected issues of relevance to the Canadian and global financial systems. The December 2014 issue features two reports on important developments in the financial system: rapid growth and innovation in the market for exchange-traded funds, and the increasing significance of cyber attacks to the operational resilience of financial institutions and financial market infrastructures.

This paper explores the arguments for and against a common currency for Canada and the United States and attempts to determine whether such an arrangement would offer any significant advantages for Canada compared with the present flexible exchange rate system. The paper first reviews the theoretical arguments advanced in the economics literature in support of fixed and flexible currency arrangements. A discussion of Canada's past experience with the two exchange rate systems follows, after which there is a survey of the empirical evidence published on Canada's current and prospective suitability for some form of fixed currency arrangement with the United States. The final section of the paper examines critically a number of concerns raised about the behaviour of the current flexible exchange rate system.