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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."

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in the prices of certain commodities — particularly energy. The first two developments are evolving roughly in line with expectations outlined in the April Monetary Policy Report.

Press releases announcing and explaining monetary policy decisions play a critical role in the communication strategy of central banks. Because of their market-moving potential, it is particularly important how they are drafted. Often, central banks start from the previous statement and update the earlier text with only small changes.

A series of major international financial crises in the 1990s, and the recent introduction of the euro, have renewed interest in alternative exchange rate systems. The choice of exchange rate regime is particularly relevant for emerging-market countries because other countries are perceived either as having no alternative to their current exchange rate arrangement or as highly unlikely to change. This article examines the evolution of exchange rate regimes in emerging markets over the past decade and compares the strengths and weaknesses of the various available systems. These include intermediate regimes, such as the adjustable pegged exchange rate popular throughout much of the post—war period, and the two extreme exchange rate regimes: permanently fixed or freely floating exchange rate regimes. Two recently proposed alternatives are also evaluated: the Managed Floating Plus and Baskets, Bands, and Crawling Pegs. Both try to combine the best elements of the flexible and fixed exchange rate systems, but the Managed Floating Plus is deemed to be the more promising alternative.

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.

The Reports section of the Financial System Review examines selected issues of relevance to the Canadian and global financial systems. The June 2014 issue features three reports on financial system initiatives: making financial benchmarks more robust; implementing the stronger Basel III capital and liquidity framework for banks; and using stress tests to assess financial system risks.

In this paper, we argue that differences in the cost structures across sectors play an important role in firms’ decisions to adjust their prices. We develop a menu-cost model of pricing in which retail firms intermediate trade between producers and consumers.

During and after the Great Recession of 2008–09, conventional monetary policy in the United States and many other advanced economies was constrained by the effective lower bound (ELB) on nominal interest rates. Several central banks implemented large-scale asset purchase (LSAP) programs, more commonly known as quantitative easing or QE, to provide additional monetary stimulus.

The issue addressed in this article is the extent to which monetary policy in Canada should respond to asset-price bubbles. The article concludes that maintaining low and stable consumer price inflation is the best contribution that monetary policy can make to promoting economic and financial stability, even when the economy experiences asset-price bubbles. In extreme circumstances—when an asset-price bubble is well identified and likely to have significant costs to the economy when it bursts—monetary policy might better maintain low and stable consumer price inflation by leaning against a particular bubble even though it may mean that inflation deviates temporarily from its target. Such a strategy might reduce the risk that a crash in asset prices could lead to a recession and to inflation markedly below target in the longer run. The circumstances where this strategy is possible will be rare because economists are far from being able to determine consistently and reliably when leaning against a particular bubble is likely to do more harm than good. Housing-price bubbles should be a greater concern for Canadian monetary policy than equity-price bubbles, since rising housing prices are more likely to reflect excessively easy domestic credit conditions than are equity prices, which are largely determined in global markets.

We use detailed consumer credit data to investigate the impact of the 2016 Fort McMurray wildfire, the costliest wildfire disaster in Canadian history, on consumers’ financial stress. We focus on the arrears of insured mortgages because of their important implications for financial institutions and insurers’ business risk and relevant management practices.