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Lectures delivered by Gordon G. Thiessen, Governor of the Bank of Canada 1994 to 2001

How do banks adjust their loan rate markup in response to macroeconomic shocks?

This paper proposes a novel asymptotic least-squares estimator of multi-country Gaussian dynamic term structure models that is easy to compute and asymptotically efficient, even when the number of countries is relatively large—a situation in which other recently proposed approaches lose their tractability.

We provide an updated evaluation of the value of various measures of core inflation that could be used in the conduct of monetary policy. We find that the Bank of Canada’s current preferred measures of core inflation—CPI-trim, CPI-median and CPI-common—continue to outperform alternative core measures across a range of criteria.

We propose a new empirical framework that jointly decomposes the conditional variance of economic time series into a common and a sector-specific uncertainty component. We apply our framework to a disaggregated industrial production series for the US economy. We identify unexpected changes in durable goods uncertainty as drivers of downturns, while unexpected hikes in non-durable goods uncertainty are expansionary.

It has been a difficult year for capital markets professionals. The turmoil has deteriorated into a full-blown financial crisis. Most financial markets have experienced historic falls in prices, and some are strained to the point of closing.

The 2007–09 global financial crisis has led policy-makers around the world, including central banks, to refocus their efforts to promote financial stability. As part of this process, central banks became quite active in supporting financial stability in a variety of ways, such as publicly sharing their assessments of financial system vulnerabilities and risks and helping to strengthen regulation, supervision and macroprudential measures.

The consumer price index (CPI) is the most commonly used measure to track changes in the overall level of prices. Since it departs from a true cost-of-living index, the CPI is subject to four types of measurement bias—commodity substitution, outlet substitution, new goods and quality adjustment. The author updates previous Bank of Canada estimates of measurement bias in the Canadian CPI by examining these four sources of potential bias. He finds the total measurement bias over the 2005–11 period to be about 0.5 percentage point per year, consistent with the Bank’s earlier findings. Slightly more than half of this bias is caused by the fixed nature of the CPI basket of goods and services.

In this issue, Bank researchers discuss the muted recovery from the 2007–09 financial crisis and possible causes. There are also discussions about the Bank’s new Canadian survey of household expectations, measuring both durable goods and housing prices in the CPI and how regulatory changes may affect monetary policy operating frameworks. In the final article, improvements to the management of Canada’s foreign exchange reserves are introduced.

We introduce bounded rationality in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to quantitatively assess the macroeconomic impact of alternative monetary policy regimes.