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In this issue of the Financial System Review, the Governing Council judges that the risks to the stability of Canada’s financial system remain high, as in December. The sources of the key risks are broadly the same as those highlighted at that time and emanate primarily from the external environment.

Errata: The colour labels for Chart 11 in the June 2012 issue and for Chart 12 in the December 2011 isssue were defined incorrectly. See revised charts.

Risks to the stability of both the Canadian and the global financial systems appeared to be diminishing for most of the period since the last Financial System Review (FSR), as the recovery in financial conditions and the macroeconomic environment continued to solidify.

FSR Highlights - June 2010

The Canadian economy entered 2022 in a strong position. The Bank is forecasting growth of 4% in 2022 and about 3½ % in 2023.

While monetary stability through low inflation is crucial to good economic performance, our economy cannot function properly unless it is also supported by an efficient and stable financial system. And as the world economy becomes increasingly interconnected, sound macroeconomic policies and sound financial systems across all countries are even more essential.

In Toward More Resilient Markets: Over-the-Counter Derivatives Reform in Canada, Michael Mueller and André Usche show that the implementation of derivatives market reforms in Canada is well under way and has lessened vulnerabilities. But accompanying changes to market structure have both positive and negative effects that require ongoing attention from authorities.

Senior Deputy Governor Carolyn Rogers talks about financial stability in an era of higher interest rates.

Governor Tiff Macklem discusses how inflation targeting became a leading strategy for maintaining price stability and how the Bank of Canada is ensuring its monetary policy framework is fit for future challenges.

Results from the summer Business Outlook Survey suggest that business sentiment is strongly negative in all regions and sectors due to impacts from the COVID 19 pandemic and the drop in oil prices. Firms reported that weak demand is reducing both capacity pressures and expectations for price growth.

Coletti and Lalonde compare inflation targeting and price-level targeting in the context of a small open economy subject to sizable terms-of-trade shocks. The authors summarize recent research that compares the ability of price-level targeting and inflation targeting to stabilize the macroeconomy when confronted with shocks similar to those experienced by Canada in recent years. Their preliminary results suggest that price-level targeting may represent a feasible alternative to traditional inflation targeting. Their article also provides insight into the direction of current research in this area at the Bank.

Schembri studies Canada's post-World War II experience in introducing a floating exchange rate, including its effects on the Canadian economy and its influence on the development of macroeconomic theory. In particular, Canada's flexible exchange rate and high degree of capital mobility with the United States provided an unprecedented experiment for macroeconomic policy. The successes and difficulties encountered by Canadian authorities in managing monetary and fiscal policy under this regime drew the interest of researchers at the International Monetary Fund and elsewhere and had a significant impact on the development of the Mundell-Fleming model, the path-breaking innovation in modern open-economy macroeconomics.