Search

Governor Mark Carney discusses why Canada’s exports are lagging and what can be done to respond to the underlying challenges.

We study a novel policy tool—interest rate uncertainty—that can be used to discourage inefficient capital inflows and to adjust the composition of external account between shortterm securities and foreign direct investment (FDI).

An essential element of the Bank of Canada's inflation-targeting framework is a floating exchange rate that is free to adjust in response to shocks that affect the Canadian and world economies. This floating rate plays an important role in the transmission mechanism for monetary policy. A practical question is how the Bank of Canada incorporates currency movements into the monetary policy decision-making process. Only after determining the cause and persistence of exchange rate change, and its likely net effect on aggregate demand, can the Bank decide on the appropriate policy response to keep inflation low, stable, and predictable. Ragan reviews the need to target inflation and the transmission mechanism for monetary policy, including the role of the exchange rate, before describing two types of exchange rate movements and their implications for monetary policy.

Uncertainty surrounding the Bank of Canada’s future policy rates is measured using implied volatility computed from interest rate options and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following major policy actions taken by the Bank in response to the 2007–09 financial crisis. Findings also indicate that, on average, uncertainty decreases following the Bank’s policy rate announcements.

We develop a simulation-based procedure to test for stock return predictability with multiple regressors. The process governing the regressors is left completely free and the test procedure remains valid in small samples even in the presence of non-normalities and GARCH-type effects in the stock returns.

This paper seeks to understand how outward foreign direct investment (FDI) affects the productivity of Canadian firms. We estimate the impact of outward greenfield investment on measures of firm-level productivity using FDI data from roughly 2,000 Canadian firms and more than 4,000 outward FDI projects over the 2003–14 period.

Unusually large revisions to CPI-common in recent months stem from increased common movements across consumer price index components amid broad inflationary pressures. With recent revisions, CPI-common is more closely aligned with the Bank of Canada’s other two preferred measures of core inflation. However, caution is necessary when interpreting real-time estimates of CPI-common in the current environment.

In this paper we document Canada’s trade policy response to late-nineteenth- and earlytwentieth-century globalization. We link newly digitized annual product-specific data on the value of Canadian imports and duties paid from 1870–1913 to establishment-specific production and location information drawn from the manuscripts of the 1871 industrial census.

We study liquidity requirements in a framework with fire sales. The framework nests three common pricing mechanisms and produces the same observables. Absent risk-sharing considerations, the equilibrium is efficient with cash-in-the-market pricing; a liquidity requirement is optimal with second-best-use pricing; and a liquidity ceiling (i.e., a cap on liquid assets) is optimal with adverse selection.

In 1995, the broad aggregate M2+ grew at an annual rate of 4.5 per cent—almost twice the rate recorded in 1994—as competition from mutual funds drew less money from personal savings deposits. An adjusted M2+ aggregate, which internalizes the effect of close substitutes such as CSBs and certain mutual funds, grew by only 3.4 per cent. Gross M1 grew by 8.2 per cent during the year, reflecting an increased demand for transactions balances as market interest rates declined and as banks offered more attractive rates of interest on corporate current account balances. The robust growth of gross M1 in the second half of 1995 suggests a moderate expansion of economic activity in the first half of 1996, while moderate growth in the broad aggregates indicates a rate of monetary expansion consistent with continued low inflation. In this annual review of the monetary aggregates, the authors also introduce a new model, based on calculated deviations of M1 from its long-run demand, which suggests that inflation should remain just below the midpoint of the inflation-control target range over the next couple of years.