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We introduce a new approach for the estimation of high-dimensional factor models with regime-switching factor loadings by extending the linear three-pass regression filter to settings where parameters can vary according to Markov processes.

This paper studies the effects of quantitative easing (QE) in a small open economy dynamic stochastic general-equilibrium model with international portfolio balancing. Portfolios are classified as imperfectly substitutable short-term and long-term subportfolios, each including domestic and foreign bonds.

The impact of COVID-19 on Canadian households’ debt and unplanned savings varies by household income. Low-income and high-income households accrued unplanned savings, while middle-income households tended to accumulate more debt.

The short-run Phillips curve describes a positive short-run relationship between the level of economic activity and inflation. When the level of demand in the economy as a whole runs ahead of the level of output that the economy can supply in the short run, price pressures increase and inflation rises. This article reviews the origins of the short-run Phillips curve with particular emphasis on the long-standing idea that the shape of this curve may be non-linear, with inflation becoming more sensitive to changes in output when the cycle of economic activity is high than when it is low. This type of non-linearity in the short-run Phillips curve, which is typically motivated by the effects of capacity constraints that limit the ability of the economy to expand in the short run, has recently attracted renewed attention. The article surveys recent research that finds some evidence of this type of non-linearity in the Phillips curve in Canada and considers the potential implications for monetary policy.

This paper studies how the credit expansion policy pursued by the Chinese government in an effort to stimulate its economy in the post-crisis period affects bank–firm loan contracts and the macroeconomy. We build a structural model with financial frictions in which the optimal loan contract reflects the trade-off between leverage and the probability of default.

This note studies a form of a utility function of consumption with habit and leisure that (a) is compatible with long-run balanced growth, (b) hits a steady-state observed target for hours worked and (c) is consistent with micro-econometric evidence for the inter-temporal elasticity of substitution and the Frisch elasticity of labor supply.

This paper evaluates the effectiveness of macroprudential policies when regulations are uneven across mortgage lender types. We look at credit tightening that results from macroprudential regulations and examine how much of it is counteracted by credit shifting to unregulated lenders. We also study the impact of monetary policy tightening when some lenders are unregulated.

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.

We demonstrate the usefulness of payment systems data and machine learning models for macroeconomic predictions and provide a set of econometric tools to overcome associated challenges.