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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.

Futurists have been speculating about the prospects for a cashless society for many years, and such predictions became more frequent following the introduction of "smart" cards - cards containing a computer chip - in the mid-1970s.

This report reviews the use of quantitative tools to gauge market participants’ assessment of banking system resilience. These measures complement traditional balance-sheet metrics and suggest that markets consider large Canadian banks to be better placed to weather adverse shocks than banks in other advanced economies. Compared with regulatory capital ratios, however, the measures suggest less improvement in banking system resilience since the pre-crisis period.

We develop a dynamic model to capture key features of decentralized finance lending. We identify a price-liquidity feedback: the market outcome in any given period depends on agents' expectations about lending activities in future periods, with higher future price expectations leading to more lending and higher prices in that period.

The COVID-19 pandemic has caused an atypical recession in which some sectors of the economy boomed and others collapsed. This required a unique fiscal policy reaction to both support firms and stimulate activity in sectors with slack. Was fiscal policy able to get where it was needed? Mostly, yes.

The current international monetary system is in need of reform. This article first provides an assessment of the existing system, highlighting both its strengths and weaknesses. It notes that the system has not facilitated the symmetric and timely adjustment in the real exchange rate necessary to accommodate the integration of China and other emerging-market economies into the global economy. This lack of adjustment contributed to the global financial crisis and recession and, because it is forestalling the required rotation of global demand, is hindering the global recovery. The article then discusses reform of the system that would see all systemically important countries and currency areas adopt market-based and convertible floating exchange rates supported by appropriate monetary, fiscal and financial sector policy frameworks. It also examines the roles of the G-20 countries and major international financial institutions in promoting and facilitating the system’s transition.

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Moroccan Coin Moulds

This bronze mould from Morocco is part of the National Currency Collection, Bank of Canada.
Photography by Gord Carter, Ottawa.

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Ready References

The book is part of the National Currency Collection, Bank of Canada.
Photography by Gord Carter, Ottawa.

Until recently, there have been few efforts to systematically measure and aggregate the nominal value of the different types of sovereign government debt in default. To help fill this gap, the Bank of Canada’s Credit Rating Assessment Group (CRAG) has developed a comprehensive database of sovereign defaults posted on the Bank of Canada’s website.

While quantitative easing (QE) in the United States likely increased capital flows to emerging-market economies (EMEs), putting upward pressure on asset prices and exchange rates, diverging fundamentals between advanced economies and EMEs were also important drivers. Evidence suggests that the benefits of QE to EMEs, in higher global demand and increased confidence, appear to outweigh the costs. When advanced economies begin to normalize monetary policy, the best defence for EMEs against any potential instability is likely to be further strengthening of their macroeconomic and financial policy frameworks.