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We study how the distribution of information supply by the news media affects the macroeconomy. We find that media coverage focuses particularly on the largest firms, and that firms’ equity financing and investment increase after media coverage. But these equity and investment responses are largest among small, rarely covered firms. Our quantitative studies highlight that the aggregate effects of media coverage depend crucially on how that coverage is allocated.

Innovations in communications and information technology and the related globalization of financial markets have created the potential for important changes to the structure of Canadian equity markets. Established marketplaces can now compete more effectively on an inter-regional and international basis. At the same time, reduced costs have lowered the barriers to entry faced by new competitors known as alternative trading systems (ATSs). In response to this heightened competition, established Canadian stock exchanges have taken measures to improve market quality. While regulators see innovation as positive for the development of Canadian markets, there is some concern that market liquidity may be fragmented in the short run. The Canadian Securities Administrators have proposed a framework that attempts to address this issue and that would allow ATSs to compete with traditional exchanges for the first time. The authors provide an overview of the Canadian equity market and its structure, focusing on these recent developments.

Deputy Governor Lawrence Schembri discusses the need to address cross-border obstacles to greater financial integration.

Economists in the nineteenth century spent considerable time discussing the merits of a free-banking system, in which each commercial bank would be able to issue its own notes and deposits, subject to a convertibility requirement backed by its own gold reserves. Such a system, the proponents argued, would be able to deliver price-level stability yet be flexible enough to withstand the vicissitudes of the business cycle. Moreover, there would be no need for central banks. While this idea has received less attention in recent years, some economists still put it forward as a practical alternative to the current system. Laidler suggests that the centralizing tendencies in banking would inevitably undermine competition within a free-banking system, and lead to the natural emergence of one dominant bank. Other developments in the twentieth century, most notably the demise of the gold standard and widespread agreement that governments should play a determining role in setting monetary policy goals, have also limited the practicality of such a system. Laidler examines the Bank of Canada's history from the free-banking perspective and concludes that the current system of inflation targeting provides a much better anchor for orderly price-level behaviour than the free-banking system's convertibility could ever guarantee.

We quantify the effects of large-scale stock purchases by a central bank and compare these to bond purchases. We find that the central bank’s equity purchases would lower the risk and term premiums on stocks and long-term bonds, respectively, and thereby stimulate economic activity.

There are two broad classes of arguments for greater flexibility in the design and application of monetary policy frameworks. The BIS has done a great deal of useful work on asset-price targeting in particular and on the complicated interplay between monetary policy and financial stability in general.

This monthly newsletter features the latest research publications by Bank of Canada economists including external publications and working papers published on the Bank of Canada’s website.

The year 2007 was marked by sharply increased volatility in financial and foreign exchange markets, and a widening of credit spreads. Despite financial market turbulence, the Canadian economy continued to expand, and inflation remained close to our target of 2 per cent. In this, my final Annual Report message, I begin by reviewing the economic and financial developments and challenges of the past year. I then highlight seven important ongoing challenges faced by Canada and the Bank during my seven years as Governor.

Using two complementary approaches, we investigate the importance of U.S. macroeconomic news in driving low-frequency fluctuations in the term structure of interest rates in Canada, Sweden and the United Kingdom. We find that U.S. macroeconomic news is particularly important to explain changes in the expectation components of the nominal, real and break-even inflation rates of small open economies.

We present a policy framework for electronic money and payments. The framework poses a set of positive questions related to the areas of responsibility of central banks: payments systems, monetary policy and financial stability. The questions are posed to four broad forms of e-money: privately or publicly issued, and with centralized or decentralized verification of transactions. This framework is intended to help evaluate the trade-offs that central banks face in the decision to issue new forms of e-money.