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We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate.

In this issue, Bank researchers discuss inflation dynamics and global trade following the 2007–09 financial crisis. Other articles explore changes to the governance and regulation of the Canadian payments system and outline the banking services provided by the Bank of Canada. Finally, the results of the 2013 Methods-of-Payment Survey are presented.

The financial crisis of 2007–09 has highlighted the importance of developments in financial conditions for real economic activity. The authors estimate the effect of current and past shocks to financial variables on U.S. GDP growth by constructing two growthbased financial conditions indexes (FCIs) that measure the contribution to quarterly (annualized) GDP growth from financial conditions.

This paper applies a static model of an interest rate corridor to the Canadian data, and estimates the aggregate demand for central-bank settlement balances in the Large Value Transfer System (LVTS).

This paper presents a structural framework of the global oil market that relies on information on global fuel consumption to identify flow demand for oil. We show that under mild identifying assumptions, data on global fuel consumption help to provide comparatively sharp insights on elasticities and other key structural parameters of the global oil market.

Carbon dioxide emissions have been commonly modelled as rising and falling with total output. Yet many factors, such as energy-efficiency improvements and shifts to cleaner energy, can break this relationship. We evaluate these factors using US data and find that changes in energy efficiency of consumption goods explain a significant proportion of emissions fluctuations. This finding also implies that models that omit energy efficiency likely overestimate the trade-off between environmental protection and economic performance.

This article examines the efforts of the major advanced countries to strengthen the international financial system in order to avoid financial crises such as those that occurred in emerging-market economies in the 1990s. These efforts have focused on crisis prevention and crisis management. The prevention of such crises has necessitated the formation of new international groups that include emerging markets in their membership. Measures have also been taken to reduce the vulnerability of countries to such crises. These measures have centered on the need for appropriate macroeconomic policies, including the need for sustainable exchange rate regimes, sound domestic financial systems, and prudent risk management. In the area of crisis management, the International Monetary Fund (IMF) has been given access to additional resources for lending to countries that experience financial crises. The IMF has also established new lending facilities for use in such circumstances. It has also been agreed that the private sector will need to play a greater role in the management of such crises in the future.

This paper uses discrete-choice models to quantify the role of consumer socioeconomic characteristics, payment instrument attributes, and transaction features on the probability of using cash, debit card, or credit card at the point-of-sale.

Although there has been some improvement in conditions over the past several weeks, strains in global credit markets have broadened since December.

FSR Highlights - June 2008

Errata: Some factual errors in the June report "Bank of Canada Oversight Activities during 2007 under the Payment Clearing and Settlement Act" have been corrected. They concern (i) clarification of the U.S. Federal Reserve as lead overseer of CLS Bank and (ii) the steps taken by CDS on 14 August 2007 to assist issuers and participants holding defaulted ABCP.

This section of the Financial System Review examines the recent performance of the Canadian financial system and the factors, both domestic and international, that are influencing it. In each issue, one or more subjects of particular interest are discussed as highlighted topics.