Exploring the potential benefits of inflation overshooting Staff Analytical Note 2021-16 Robert Amano, Marc-André Gosselin, Kurt See After a period with the interest rate at the effective lower bound, temporarily overshooting inflation may offer important economic benefits. This may be especially true for vulnerable segments of the population, such as workers with low attachment to the labour force and the long-term unemployed. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Inflation targets, Labour markets, Monetary policy, Monetary policy framework JEL Code(s): E, E3, E31, E5, E52, J, J2, J20
Stressed but not Helpless: Strategic Behaviour of Banks Under Adverse Market Conditions Staff Working Paper 2021-35 Grzegorz Halaj, Sofia Priazhkina Our stress-testing tool considers banks under stress that can strategically manage their balance sheets. Using confidential Canadian supervisory data, we assess whether bank behaviour to maximize shareholder value can amplify a hypothetical stress scenario. Content Type(s): Staff research, Staff working papers Research Topic(s): Central bank research, Economic models, Financial institutions, Financial stability, Financial system regulation and policies JEL Code(s): C, C6, C63, C7, C72, G, G2, G21
Sequencing Extended Monetary Policies at the Effective Lower Bound Staff Discussion Paper 2021-10 Yang Zhang, Lena Suchanek, Jonathan Swarbrick, Joel Wagner, Tudor Schlanger In this analysis, we use simulations in the Bank of Canada’s projection model—the Terms-of-Trade Economic Model—to consider a suite of extended monetary policies to support the economy following the COVID-19 crisis. Content Type(s): Staff research, Staff discussion papers Research Topic(s): Coronavirus disease (COVID-19), Monetary policy, Monetary policy transmission JEL Code(s): E, E3, E4, E5, E52, E58
The Side Effects of Safe Asset Creation Staff Working Paper 2021-34 Sushant Acharya, Keshav Dogra The secular decline in real interest rates has created a challenge for monetary policy, now confronting the zero lower bound more often. An increase in the supply of safe assets reduces downward pressure on the natural interest rate. This allows monetary policy to reach price stability and full employment, but not without cost—permanently lower investment. Content Type(s): Staff research, Staff working papers Research Topic(s): Fiscal policy, Monetary policy implementation JEL Code(s): E, E3, E4, E5, G, G1, H, H6
The Anatomy of Sentiment-Driven Fluctuations Staff Working Paper 2021-33 Sushant Acharya, Jess Benhabib, Zhen Huo We show that changes in sentiment that aren’t related to fundamentals can drive persistent macroeconomic fluctuations even when all economic agents are rational. Changes in sentiment can also affect how fundamental shocks affect macroeconomic outcomes. Content Type(s): Staff research, Staff working papers Research Topic(s): Business fluctuations and cycles, Economic models JEL Code(s): E, E2, E20, E3, E32, F, F4, F44