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We compare the determinants of consumer inflation expectations in the US and Canada by analyzing two current surveys. We find that Canadian consumers rely more on professional forecasts and the history of actual inflation when forming their expectations, while US consumers rely more on their own lagged expectations.

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.

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 TSX index rose by 9.5 percent in November 2020, adding large gains to an already sharp V-shaped recovery. The economic outlook improved at that time as well. We ask whether the stock market gains since last autumn are due to improving forecasts of firms’ earnings.

The size of China’s financial system raises the possibility that the liberalization of its capital account could have a large effect on the global financial system. This paper provides a counterfactual scenario analysis that estimates what the size and direction of China’s overseas portfolio investments would have been in 2015 if China had had no restrictions on these outflows.

Senior Deputy Governor Carolyn Wilkins discusses the state of the labour market, the impact of lower oil prices on Canada’s economic outlook and the importance of both for monetary policy.

This article summarizes the proceedings of an international research conference hosted by the Bank of Canada in November 2000. The conference marked the fiftieth anniversary of Canada's adoption of a flexible exchange rate, and its title recognizes the seminal contribution of Professor Milton Friedman's article "The Case for Flexible Exchange Rates." His keynote address to the conference is also summarized in the article. The conference papers re-examine many of the arguments raised by Friedman using recent developments in economic theory and econometric techniques. They investigate the experience of a wide range of industrialized and emerging-market economies. The main findings are that a strong case can be made for flexible exchange rates in economies that are large commodity exporters and that have credible low-inflation monetary policies and relatively well-developed financial systems.

Staff projections provided for the Bank of Canada's monetary policy decision process take into account the integration of Canada's very open economy within the global economy, as well as its close real and financial linkages with the United States. To provide inputs for this projection, the Bank has developed several models, including MUSE, NEUQ (the New European Quarterly Model), and BoC-GEM (Bank of Canada Global Economy Model), to analyze and forecast economic developments in the rest of the world. The authors focus on MUSE, the model currently used to describe interaction among the principal U.S. economic variables, including gross domestic product, inflation, interest rates, and the exchange rate. Brief descriptions are also provided of NEUQ and BoC-GEM.

We propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We study the implications of financial integration on monetary policy transmission. Among various aspects of financial integration, the bond duration plays a major role. These results hold for conventional and unconventional monetary policies.

Deputy Governor Paul Beaudry discusses how financial vulnerabilities present a challenge for monetary policy.