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This article examines the recent proposition that the decline in Canada's standard of living relative to that of the United States is causally related to the decline in our exchange rate. The authors explore the main channels through which the exchange rate and the standard of living could be related—productivity and the terms of trade—focusing mainly on productivity. They conclude that the decline in world commodity prices and weak demand for domestic output were affecting both Canada's standard of living and the exchange rate and that the flexible exchange rate regime itself did not play an independent role.

We construct a dataset on Federal Reserve and Bank of Canada non-rate announcement events to provide novel insights into how foreign and domestic monetary policy communications affect the financial markets of open economies. We find that Fed non-rate communications have a stronger impact on long-term interest rates and stock futures, while Bank of Canada communications are relatively more important for short-term interest rates and the exchange rate.

Deputy Governor Paul Beaudry discusses the latest interest rate decision and suggests reasons why longer-term interest rates could remain higher than they were before the pandemic.

This issue of the Financial System Review reflects the Bank’s judgment that high household indebtedness and housing market imbalances remain the most important vulnerabilities. While these vulnerabilities remain elevated, policy measures continue to improve the resilience of the financial system. A third vulnerability highlighted in the FSR concerns cyber threats to an interconnected financial system.

Canadian economic activity is evolving largely as expected. Inflation is now near the middle of the Bank of Canada’s control range of 1% to 3%.

The global economy has shown greater strength than was anticipated at the time of the November Report.

This issue features three articles that present research and analysis by Bank of Canada staff. The first updates previous Bank estimates of measurement bias in the Canadian consumer price index; the second uses a new term-structure model to analyze the relationship between the short-term policy rate and long-term interest rates; and the third examines indicators of balance-sheet risks at financial institutions in Canada.

Two major issues dominate the analysis and policy discussion in this Monetary Policy Report: the nature and extent of the global economic slowdown that began late last year and the consequences of the terrorist attacks in the United States.

This paper combines loan-level administrative data with household-level survey data to analyze the impact of recent macroprudential policy changes in Canada using a microsimulation model of mortgage demand of first-time homebuyers.