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A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework.

Commodity prices are once again making headlines. Some commodity prices, such as those for copper and cattle, have reached record highs; others are rising quickly and approaching previous peaks.

In recent years, the Bank has put renewed emphasis on analyzing monetary variables and on developing models that incorporate money as an active part of the transmission mechanism. In this article, Dinah Maclean describes how the monetary aggregates are used in the formulation of monetary policy analysis at the Bank, outlining the key tools and models used. The most important money-based model currently in use is the M1-VECM. In this model, deviations in the money supply from the long-term demand for money cause changes in inflation. The author briefly describes the "active-money" paradigm underlying this model and explains the key equations within it. Other simpler empirical models are also outlined, including single-equation indicator models for output based on the narrow aggregates, a neural network, and a model based on the broader aggregate M2++. A detailed technical annex provides details on model equations and coefficient values.

For central banks, conducting policy in an environment of uncertainty is a daily fact of life. This uncertainty can take many forms, ranging from incomplete knowledge of the correct economic model and data to future economic and geopolitical events whose precise magnitudes and effects cannot be known with certainty.

We analyze the dynamic and heterogeneous responses of small-business loan performance to a monetary-policy shock using loan-level data in Canada. We find evidence of monetary policy transmission through the cash-flow channel and the aggregate demand channel as well as some, though limited, impact of collateral to discipline loan repayment.

Following the recent financial crisis, major central banks have introduced several types of unconventional monetary policy measures, including liquidity and credit facilities, asset purchases and forward guidance. To date, these measures appear to have been successful. They restored market functioning, facilitated the transmission of monetary policy and supported economic activity. They have potential costs, however, including challenges related to the greatly expanded balance sheets of central banks and the eventual exit from these measures, as well as the vulnerabilities that can arise from prolonged monetary accommodation.

This paper introduces a new methodology to date systemic financial stress events in a transparent, objective and reproducible way. The financial cycle is captured by a monthly country-specific financial stress index.

We explore properties of asymmetric generalized autoregressive conditional heteroscedasticity (GARCH) models in the threshold GARCH (GTARCH) family and propose a more general Spline-GTARCH model, which captures high-frequency return volatility, low-frequency macroeconomic volatility as well as an asymmetric response to past negative news in both autoregressive conditional heteroscedasticity (ARCH) and GARCH terms.

The existence of downward nominal wage rigidity (DNWR) has often been used to justify a positive inflation target. It is traditionally assumed that positive inflation could “grease the wheels” of the labour market by putting downward pressure on real wages, easing labour market adjustments during a recession.

Worst-case analysis is used among financial regulators in the wake of the recent financial crisis to gauge the tail risk. We provide insight into worst-case analysis and provide guidance on how to estimate it. We derive the bias for the non-parametric heavy-tailed order statistics and contrast it with the semi-parametric extreme value theory (EVT) approach.