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Bank regulation presumes risks spill over more easily from large banks to the banking system than vice versa. Interestingly, we observe this is not the case. We find that the capacity to transmit risk is larger in the system-to-bank direction, leading to an increased default risk.

Since 1997 when the Bank of Canada last published a review of the Canadian overnight market, several important changes have affected the market's structure and dynamics. Reid provides a current overview of the market, examining the financial instruments, market transparency and flows, and the collateralized overnight rate as it has evolved since the introduction of the Large Value Transfer System and the fixed announcement dates. Other significant influences include changes in market practices regarding risk management, the rise of securities lending, the increased demand for collateral, and the Bank of Canada's measures to reinforce the target for the overnight rate.

We study the cross-section of equilibrium returns on safe assets using a tractable asset pricing model with a micro-founded demand for liquidity and multiple safe assets with heterogeneous transaction costs. We test the main predictions of our theory using a novel measure of relative (in)convenience yields in the US Treasury market.

Canada’s financial system is resilient. Overall, households, businesses, banks and non-bank financial intermediaries successfully weathered the pandemic, a period of elevated inflation, and sharp increases in interest rates. But the trade war currently threatens the Canadian economy and poses risks to financial stability.

There has recently been considerable discussion about the ability of inflation to facilitate the adjustment of prices and wages and thus enhance economic performance. The discussion centres on whether wages are downwardly rigid. Wages are said to be downwardly rigid if it is difficult for the wages of some workers to fall despite underlying supply and demand pressures for decreases. Some authors have suggested that if downward nominal wage rigidity is prevalent it would be desirable to select a positive rate of inflation as the target for monetary policy. In this article, the authors evaluate the wage-rigidity hypothesis. They first examine the empirical evidence to assess whether the degree of downward rigidity is significant in Canada. They then analyze some key assumptions of the wage-rigidity hypothesis and its implications for employment. They also look at the empirical evidence on whether the combination of downward wage rigidity and low inflation has reduced employment.

Since the Bank of Canada adopted inflation targeting in 1991, it has focused on a measure of core inflation as a shorter-term guide for monetary policy. When the targets were renewed in 2001, the Bank adopted CPIX as its measure of core inflation because of the advantages it offered. Leflèche and Armour review the experience with CPIX and whether the criteria used to select it in 2001 still favour the measure today. They describe the various measures of core inflation monitored by the Bank and evaluate them on the basis of the volatility of the components, the volatility of the core measures themselves, absence of bias relative to total CPI, predictive power, and certain practical criteria, including timeliness and credibility. They conclude that CPIX still satisfies all the empirical and practical criteria.

Risk assessment models are an important component of the Bank’s analytical tool kit for assessing the resilience of the financial system. We describe the Framework for Risk Identification and Assessment (FRIDA), a suite of models developed at the Bank of Canada to quantify the impact of financial stability risks to the broader economy and a range of financial system participants (households, businesses and banks).

by James F. Dingle. Outlines the history of the Association and its role in moving Canada's payments system from paper to electronic media.

Proceedings of a Conference Co-sponsored by the New York Association for Business Economics and the Canadian Consulate General in New York, February 2006 (papers in unedited, electronic format only)

This paper proposes a new bootstrap procedure for mean squared errors of robust small-area estimators. We formally prove the asymptotic validity of the proposed bootstrap method and examine its finite sample performance through Monte Carlo simulations.