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We introduce the Homoscedastic Gamma [HG] model where the distribution of returns is characterized by its mean, variance and an independent skewness parameter under both measures. The model predicts that the spread between historical and risk-neutral volatilities is a function of the risk premium and of skewness.

On 8 and 9 June 2000, the Bank held a seminar to examine some key issues affecting the upcoming decision on Canada's inflation-control target for the period after 2001. The main issues covered at the seminar were the extent of downward nominal-wage rigidity and its implications for employment as well as the relative merits of price-level targeting versus inflation targeting. Another critical question that was discussed was how to balance the evidence on all the relevant issues in order to develop an overall view on the appropriate long-run target. The author gives a brief overview of the seminar followed by detailed summaries of individual papers.

In the United States prior to 1863 each bank issued its own distinct notes. E-money shares many of the characteristics of these bank notes. This paper describes some lessons relevant to e-money from the U.S. experience with state bank notes.

We identify two channels that affect the relationship between inflation and unemployment. First, inflation lowers wages because unemployed suffer more from inflation than employed, generating a positive relationship. Second, inflation increases firms’ financing costs, generating a negative relationship. Improvements in firm financing conditions can induce the relationship to switch signs.

We add agency costs as in Carlstrom and Fuerst (1997) into a two-country, two-good international business-cycle model. In our model, changes in the relative price of investment arise endogenously.

This paper explores the extent to which factors other than commodity and energy prices may have contributed to the Canadian dollar's depreciation since the early 1970s. The variables considered include among others budgetary conditions and productivity.

Many decentralized markets are able to attain a stable outcome despite the absence of a central authority (Roth and Vande Vate, 1990). A stable matching, however, need not be efficient if preferences are weak. This raises the question whether a decentralized market with weak preferences can attain Pareto efficiency in the absence of a central matchmaker.

The author attempts to track Canadian labour productivity over the past four decades using a multivariate dynamic factor model that, in addition to the labour productivity series, includes aggregate compensation and consumption information. Productivity is assumed to switch between two regimes (the high-growth state and the low-growth state) with different trend growth rates according to […]

We use data from the Canadian Survey of Consumer Expectations to understand how households are coping with high inflation and high interest rates. We build a subjective measure of financial stress and find that the level of stress is at a historical high but remains manageable for most households.

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.