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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.

This article reviews and examines some of the main explanations for the slow growth that many advanced economies continue to experience seven years after the 2007–09 global financial crisis. Does this muted recovery reflect just a prolonged cycle in the aftermath of a financial crisis? Is it due to a structural inadequacy of demand leading to a long-lasting liquidity trap? Or is it largely supply side in nature, reflecting demographic and technological factors?

Recent evidence indicates that the intensity of economic exchange within and across borders is significantly different: linkages are much tighter within, than among, nation-states. These findings, however, do not necessarily imply that borders and separate national currencies represent significant barriers to trade that should be removed, since the evidence is also consistent with the alternative hypothesis, that domestic exchange is more efficient because domestic producers are better able to satisfy the requirements of local consumers, owing to common tastes and institutions and the existence of local information and social networks. Focusing primarily on trade linkages within and between Canada and the United States, the authors review the evidence on the extent to which national borders lessen the intensity of international economic linkages, primarily trade in goods and services, and the effects on domestic welfare. They also examine the evidence on the impact of common currencies on trade and welfare. They determine that, since the empirical models employed to date in this research cannot distinguish between alternative explanations of the evidence, it is not yet possible to draw firm conclusions for policy-making.

We present a dynamic debt strategy model framework designed to assist sovereign debt portfolio managers in choosing an optimal debt issuance strategy. The main innovation of this framework is the introduction of dynamic issuance strategies, which allow issuance decisions to vary over time based on the model’s simulated state variables.

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.

Remarks by David Longworth, Deputy Governor of the Bank of Canada to the Canadian Association for Business Economics

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.

Ron Morrow, Executive Director of Payments, Supervision and Oversight, talks about innovations in the payments ecosystem. He also highlights the Bank’s new role as supervisor of payment service providers.

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.