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In this issue, Bank researchers discuss the muted recovery from the 2007–09 financial crisis and possible causes. There are also discussions about the Bank’s new Canadian survey of household expectations, measuring both durable goods and housing prices in the CPI and how regulatory changes may affect monetary policy operating frameworks. In the final article, improvements to the management of Canada’s foreign exchange reserves are introduced.

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.

The Bank projects that growth in the Canadian economy will accelerate from 1.6 percent this year to 2 percent in 2021.

The secular decline in real interest rates has created a challenge for monetary policy, now confronting the zero lower bound more often. An increase in the supply of safe assets reduces downward pressure on the natural interest rate. This allows monetary policy to reach price stability and full employment, but not without cost—permanently lower investment.

The elimination of long-term contracts and early termination fees (ETFs) in the US wireless industry at the end of 2015 increased monthly service fees by 2 to 5 percent. Nevertheless, consumers are clearly better off without ETFs. While firms’ revenues from ETFs vanish, their profits from monthly fees increase. As a result, the overall effect on producer profits is less clear.

This special issue of the Review, “Lessons from the Financial Crisis,” examines the recent research on the role of liquidity in the financial system and on the public policy responses that aimed to restore stability to the financial system during the crisis and to foster economic recovery.

We study the trading of an asset with bankruptcy risk. The traded price of the asset is, on average, 40% of the expected total dividend payments. We investigate which economic models can explain the low traded price.

We create a theoretical model of central bank asset purchases. The model helps explain how, in a crisis, these purchases ease pressures on investment dealers.

Cover page

The "pretended" Bank of Upper Canada — Kingston (1819-22)

The note is part of the National Currency Collection of the Bank of Canada.
Photography by Gord Carter

We consider structural vector autoregressions that are identified through stochastic volatility. Our analysis focuses on whether a particular structural shock can be identified through heteroskedasticity without imposing any sign or exclusion restrictions.