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Understanding how much of the increased debt load of Canadian households has been used to finance household spending on consumption and home renovation is important for the conduct of monetary policy. In this article, the authors use a comprehensive data set that provides information on the uses of debt by Canadian households. They first present some facts regarding the evolution of Canadian household debt over the period from 1999 to 2010, emphasizing the increased importance of debt flows that are secured by housing. They then explore how Canadian households have used their borrowed funds over the same period, and assess the role of these borrowed funds in financing total consumption and spending on home renovation. Finally, they examine the possible effects of a decline in house prices on consumption when housing equity is used as collateral against household indebtedness.

Senior Deputy Governor Carolyn A. Wilkins discusses what the economy will need once we’re past the COVID-19 crisis.

We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral.

The author compares the performance of three Gaussian approximation methods - by Nowman (1997), Shoji and Ozaki (1998), and Yu and Phillips (2001) - in estimating a model of the nonlinear continuous-time short-term interest rate.

We quantitively assess the risks of a wage-price spiral occurring in Canada over history. We find the risk of a wage-price spiral increases when the inflation expectations become unanchored and the credibility of central banks declines.

A measure of the neutral policy interest rate can be used to gauge the stance of monetary policy. We define the neutral rate as the real policy rate consistent with output at its potential level and inflation equal to target after the effects of all cyclical shocks have dissipated.

Gosselin examines and reports on the various factors that contribute to successful inflation targeting. Using a panel of 21 inflation-targeting countries over the period 1990Q1-2007Q2, Gosselin finds that the ability of central banks to hit their targets varies considerably. Some of these differences can be explained by exchange rate fluctuations, fiscal deficits, and differences in financial development. Others are explained by differences in the targeting framework itself and the manner in which it is implemented.

Canada plans to adopt a retail payment system to allow Canadians to pay in real time (or near real time) 24 hours a day, 7 days a week. However, the traditional model for setting the overnight interest rate does not operate 24/7.

The resurgence of sizable current account imbalances in the major economies in recent years, particularly the tripling of the U.S. deficit, has led to renewed academic and public discussions about their sustainability. Jacob's main objective is to show that current account balances are simply the outcome of various relative structural and cyclical forces between trading partners. He reviews the factors behind the changes in the current account positions of the three largest industrial economies (the United States, Japan, and the euro area). Two strong determinants shaping the current account balances are the faster increase in U.S. productivity compared with that of other major economies and, more recently, the loosening in the U.S. fiscal stance. Jacob also reviews a range of outside assessments from such sources as the Organisation for Economic Co-operation and Development and the International Monetary Fund, as well as the academic literature, to determine the possible risks to macroeconomic and financial stability.