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Recently, the Bank of Canada has estimated the effective lower bound (ELB) on its policy interest rate to be about -50 basis points. This article outlines the analysis that underpins that estimate by quantifying the costs of storing and using cash in Canada. It also explores how some international markets have adapted to negative interest rates, issues surrounding their implementation, as well as their transmission to other interest rates in the economy. Finally, it discusses theoretical ideas on how the ELB could be reduced further.

This note examines how monetary policy responses to shelter inflation affect both the overall economy and different households. We find that the aggregate macroeconomic effects of responding to shelter inflation are modest, whereas the redistributive consequences across households are substantially larger.

We study how the interaction of market power and nominal price rigidity influences inflation dynamics. We find that pass-through declines with price stickiness when markets are concentrated, which implies a lower slope of the New Keynesian Phillips curve.

Recessions feature elevated uncertainty. We develop a nonlinear imperfect-information New Keynesian model where procyclical information quality generates endogenous countercyclical uncertainty and precautionary saving. This demand channel can overturn the inflationary impact of negative supply shocks, making them deflationary, unless monetary policy stabilizes the output gap.

We forecast recessions in Canada using an autoregressive (AR) probit model. The results highlight the short-term predictive power of the US economic activity and suggest that financial indicators are reliable predictors of Canadian recessions. In addition, the suggested model meaningfully improves the ability to forecast Canadian recessions, relative to a variety of probit models proposed in the Canadian literature.

In our analysis of the US productivity slowdown in the 1970s and 2000s, we find that a significant portion of this deceleration can be attributed to a lack of improvement in allocative efficiency across sectors. Our analysis further identifies increased sector-level volatility as a major contributor to this lack of improvement in allocative efficiency.

In Monitoring Shadow Banking in Canada: A Hybrid Approach, Bo Young Chang, Michael Januska, Gitanjali Kumar and André Usche discuss how lending that occurs outside the traditional banking system provides benefits to the economy but must be monitored carefully for potential financial sector vulnerabilities. They describe how the Bank defines and measures shadow banking and how it assesses vulnerabilities in the sector, using an approach that examines both markets and entities.

Did supply disruptions and cost pressures play a role in rising inflation in 2020 during the COVID-19 pandemic? Using data collected from websites of large retailers in multiple sectors and countries, we show that shortages may indicate transitory inflationary pressures.

The financial system makes an important contribution to the welfare of all Canadians. The ability of households and firms to confidently hold and transfer financial assets is one of the fundamental building blocks of the Canadian economy.

Technology, risk tolerance and regulation may influence dealers to reduce their trading as principals (using their own balance sheets for sales and purchases of securities) in favour of agency trading (matching client trades).