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We present a two-country model featuring risky lending and cross-border interbank market frictions.

This issue focuses on the upcoming renewal of Canada’s inflation-control target. Bank researchers discuss the estimate of the lower bound to policy interest rates in Canada. They also discuss downward nominal wage rigidity and whether its presence warrants considering a higher inflation target. The third article highlights the experience some international central banks have had with unconventional monetary policies. The final article describes monetary policy frameworks in 10 advanced economies.

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The "pretended" Bank of Upper Canada — Kingston (1819-22)

The note is part of the National Currency Collection of the Bank of Canada.
Photography by Gord Carter

Central counterparties can make over-the-counter markets more resilient and reduce systemic risk by mitigating and managing counterparty credit risk. These benefits are maximized when access to central counterparties is available to a wide range of market participants. In an over-the-counter market, there is an important trade-off between risk and competition. A model of an over-the-counter market shows how risk and competition could be influenced by the incentives of market participants as they move to central clearing. In a centrally cleared market, there may be less risk when participation is high. This helps to explain why regulators have put in place requirements for fair, open and risk-based access criteria.

Using newly matched data on US defense contracts and restricted administrative employment data, we show that the employment effects of defense procurement are costly, concentrated and slow to diffuse.

We estimate an aggregate elasticity of substitution between capital and labor near or below one, which implies that capital deepening cannot explain the global decline in labor's share. Our methodology derives from transition paths in the neo-classical growth model.

Building on an earlier Review article, the authors critically reassess the premise that exchange rate pass-through (ERPT) has declined in light of recent studies of the issue in the context of a dynamic stochastic general-equilibrium framework.

Various drivers of business investment can be used to explain the underwhelming performance of investment in advanced economies since the global financial crisis, particularly since 2014. The slow growth in aggregate demand cannot by itself explain the full extent of the recent weakness in investment, which appears to be linked primarily to the collapse of global commodity prices and a rise in economic uncertainty. Looking ahead, business investment growth is likely to remain slower than in the pre-crisis period, largely because of structural factors such as population aging.

Shocks to a currency area can and often do have asymmetric impacts on its regions that, in the absence of perfect labour mobility, lead to gaps in relative labour market performance. Witness, for example, the effects of the 2008/09 recession and subsequent financial crisis in Europe on the dispersion of employment rates across the euro area – and to a lesser extent the United States.