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The turmoil in global financial markets entered a new phase in September, moving to a more acute and broad-based loss of confidence in the context of a series of failures and near-failures of large financial institutions in the United States and Europe.

FSR Highlights - December 2008

How do banks' interconnections in the euro area contribute to the vulnerability of the banking system? We study both the direct interconnections (banks lend to each other) and the indirect interconnections (banks are exposed to similar sectors of the economy). These complex linkages make the banking system more vulnerable to contagion risks.

Can central bank and government policies impact the risks around the outlook for GDP growth? We find that fiscal stimulus makes strong GDP growth more likely—even more so when monetary policy is constrained—rather than weak GDP growth less likely. Thus, fiscal stimulus should accelerate the recovery phase of the COVID-19 pandemic.

This paper finds that Government of Canada benchmark bonds tend to be more illiquid over the subsequent month when there is a large increase in government debt supply. The result is both statistically and economically significant, stronger for the long-term than the short-term sector, and is robust when other macro factors are controlled for.

We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously.

Developments are underway to replace Canada’s two core payment systems with three new systems. We use a discrete choice model to predict migration patterns of end-users and financial institutions for future systems and discuss their policy implications.

Previous research suggests that lower-income Canadians may have unique experiences with the use of payments, including the use of cash and digital payments. We conduct a case study using data from [the Canadian Financial Diaries project/Canadian financial diaries] to gain insight into how some lower-income Canadians pay.

Based on empirical evidence, I propose a dynamic stochastic general equilibrium model with two financial sectors to analyze the role of corporate debt composition (bank versus bond financing) in the transmission of economic shocks.

Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data.

We use data from the Canadian Survey of Consumer Expectations to understand how households are coping with high inflation and high interest rates. We build a subjective measure of financial stress and find that the level of stress is at a historical high but remains manageable for most households.