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This paper studies exchange rate dynamics by incorporating bounded rationality, that is, limited foresight, in a small open-economy model. This behavior of limited foresight helps explain several observations and puzzles in the data of exchange rate movements.

During downturns, workers get stuck in low-productivity jobs and wages remain stagnant. I build an heterogenous agent incomplete market model with a full job ladder that accounts for these facts. An adverse financial shock calibrated to the US Great Recession replicates the period’s slow recovery and missing disinflation.

In the Doug Purvis Memorial Lecture, Governor Stephen S. Poloz shows how changing the mix of monetary and fiscal policies can yield the same outcomes for growth and inflation, but lead to different results for public sector and private sector debt levels, which can impact financial stability.

This note uses industry data and a unique dataset of small and medium-sized merchants to provide insights into the acquirer-merchant market in Canada.

Privacy-enhancing technologies (PETs) could offer solutions to safeguard end-user privacy and meet rigorous data protection standards for central bank digital currencies. We consider how PETs can transform privacy design in financial systems and the implications of their broader adoption.

Financial market expectations regarding future changes in the target for the overnight rate of interest are an important source of information for the Bank of Canada. Financial markets are the mechanism through which the policy rate affects other financial variables, such as longer-term interest rates, the exchange rate, and other asset prices. An accurate measure of their expectations can therefore help policy-makers assess the potential impact of contemplated changes. Johnson focuses on the expectations hypothesis, which measures expectations of future levels of the target overnight rate as implied by current money market yields. Although expectations can be derived from the current yield on any short-term fixed-income asset, some assets have proven to be more accurate predictors than others. The implementation of a policy of fixed-announcements dates has coincided with the increased predictive power of these short-term assets. As a result of this improvement, a relatively simple model of the yield curve can now provide an accurate measure of financial market expectations.

The Reports section of the Financial System Review examines selected issues of relevance to the Canadian and global financial systems. The June 2015 issue features two reports summarizing recent work by Bank of Canada staff on specific financial sector policies.

This note presents PULSE, a new measure of underlying inflation in Canada based on a dynamic factor model estimated on disaggregated inflation data. PULSE captures the persistent component of inflation and decomposes it into broad-based and sector-specific inflationary pressures.

How do global oil price shocks spread through Canada’s economy? With Canada’s regionally diverse economy in mind, we explore the implications of oil price shocks for Canadian housing markets and regional economies. We show that the belief that oil price shocks only matter in oil-rich regions is false.