Examining recent revisions to CPI-common Staff analytical note 2022-15 Elyse Sullivan 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. Content Type(s): Staff research, Staff analytical notes JEL Code(s): C, C1, C13, C18, E, E3, E31 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures
Small‐Sample Tests for Stock Return Predictability with Possibly Non‐Stationary Regressors and GARCH‐Type Effects Staff working paper 2017-10 Sermin Gungor, Richard Luger 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. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C1, C12, C3, C32, G, G1, G14 Research Theme(s): Financial markets and funds management, Market functioning, Models and tools, Econometric, statistical and computational methods
Is This Normal? The Cost of Assuming that Derivatives Have Normal Returns Staff working paper 2024-46 Radoslav Raykov Derivatives exchanges often determine collateral requirements, which are fundamental to market safety, with dated risk models assuming normal returns. However, derivatives returns are heavy-tailed, which leads to the systematic under-collection of collateral (margin). This paper uses extreme value theory (EVT) to evaluate the cost of this margin inadequacy to market participants in the event of default. Content Type(s): Staff research, Staff working papers JEL Code(s): G, G1, G10, G11, G2, G20 Research Theme(s): Financial markets and funds management, Market functioning, Financial system, Financial stability and systemic risk, Financial system regulation and oversight
Downward Nominal Wage Rigidity Meets the Zero Lower Bound Staff working paper 2017-16 Robert Amano, Stefano Gnocchi We add downward nominal wage rigidity to a standard New Keynesian model with sticky prices and wages, where the zero lower bound on nominal interest rates is allowed to bind. We find that wage rigidity not only reduces the frequency of zero bound episodes but also mitigates the severity of corresponding recessions. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E24, E3, E32, E5, E52 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Real economy and forecasting
How to Manage Macroeconomic and Financial Stability Risks: A New Framework Staff analytical note 2018-11 Alexander Ueberfeldt, Thibaut Duprey Financial system vulnerabilities increase the downside risk to future GDP growth. Macroprudential tightening significantly reduces financial stability risks associated with vulnerabilities. Monetary policy faces a trade-off between financial stability and macroeconomic risks. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E4, E44, E5, E52, E58, G, G0, G01 Research Theme(s): Financial system, Financial stability and systemic risk, Financial system regulation and oversight, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
October 5, 2005 The Exchange Rate and Canadian Inflation Targeting Bank of Canada Review - Autumn 2005 Christopher Ragan 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. Content Type(s): Publications, Bank of Canada Review articles
Interest Rate Uncertainty as a Policy Tool Staff working paper 2020-13 Fabio Ghironi, Galip Kemal Ozhan 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). Content Type(s): Staff research, Staff working papers JEL Code(s): E, E3, E32, F, F2, F21, F3, F32, G, G1, G15 Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Monetary policy tools and implementation, Structural challenges, International trade, finance and competitiveness
Assessing the Predictive Ability of Sovereign Default Risk on Exchange Rate Returns Staff working paper 2017-19 Claudia Foroni, Francesco Ravazzolo, Barbara Sadaba Increased sovereign credit risk is often associated with sharp currency movements. Therefore, expectations of the probability of a sovereign default event can convey important information regarding future movements of exchange rates. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C2, C22, C5, C52, C53, F, F3, F31 Research Theme(s): Financial markets and funds management, International markets and currencies, Models and tools, Econometric, statistical and computational methods
Cash and COVID-19: What happened in 2021 Staff discussion paper 2022-8 Heng Chen, Walter Engert, Kim Huynh, Daneal O’Habib, Joy Wu, Julia Zhu Using data from the Bank Note Distribution System and consumer surveys, we find that bank notes in circulation remained high through 2021. Canadians continued to rely on electronic methods of payment, but a significant share also continued using cash for payments. Content Type(s): Staff research, Staff discussion papers JEL Code(s): C, C1, C12, C9, E, E4, O, O5, O54 Research Theme(s): Money and payments, Cash and bank notes, Retail payments
May 15, 1999 Recent developments in the monetary aggregates and their implications Bank of Canada Review - Spring 1999 Joseph Atta-Mensah, Loretta Nott In its conduct of monetary policy, the Bank of Canada carefully monitors the pace of monetary expansion for indications about the outlook for inflation and economic activity. In recent years, a number of factors have distorted the growth of the traditional broad and narrow aggregates. In this article, the authors discuss the uncertainty surrounding the classification of deposit instruments that has resulted from the elimination of reserve requirements and from other financial innovations. They introduce two new measures of transactions balances, M1+ and M1++ (described more fully in a technical note in this issue of the Review), that internalize some of the substitutions that have occurred. They attribute the deceleration in M1 growth in 1998 partly to the declining influence of special factors, partly to a lagged response to interest rate increases in 1997 and early 1998, and partly to some temporary tightening in credit conditions in the autumn of 1998. The broad monetary aggregate M2++, which includes all personal savings deposits, life insurance annuities, and mutual funds, grew at a steady pace in 1998, presaging growth of about 4 to 5 per cent in total dollar spending and inflation inside the target range. Content Type(s): Publications, Bank of Canada Review articles