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Empirical evidence suggests that the unemployment rate and the export/GNP ratio are positively correlated with external debt across developing countries. This paper develops a dynamic model that provides an explanation for the aforementioned relationships. The central idea of our paper is that international borrowing affects unemployment and specialization patterns by unevenly changing the risk-sharing structure—across […]

The European Union, which currently consists of 15 states, occupies an important place among the advanced economies. The final stage of the European economic and monetary union (EMU) is scheduled to begin in January 1999 with the adoption of a common currency called the "euro." A decision on which countries will participate in the euro area in 1999 will be made next spring based in part on the achievement of the economic criteria laid out in the Maastricht Treaty. In this article, the authors, after a brief discussion of the historical background, cast some light on the institutional aspects of the EMU, on the formulation and implementation of economic policy, as well as on the internal and external effects of EMU completion. For Canada, the direct implications of the shift to the euro appear to be relatively modest, at least in the short run.

Cyclical contractions are often referred to as inventory cycles, in part because movements in inventories can amplify cyclical fluctuations in output. An unanticipated slowing in demand generally leads to an unintended buildup of inventories: only with a lag do firms adjust production and their actual holding of inventories relative to the desired level.

A monetary authority with the primary objective of price stability has to distinguish between temporary price shocks and persistent shocks to the rate of inflation. A measure of underlying inflation, therefore, has an important role to play as a guideline for monetary policy.

This paper attempts to reduce the uncertainty about the dynamics of the monetary transmission mechanism. Central to this attempt is the identification of monetary policy shocks. Recently, VAR approaches that use over-identifying restrictions have shown success in isolating such shocks.

Japanese economic activity has been stagnant since the collapse of the speculative asset-price bubble in 1990, despite highly expansionary monetary policy which has brought interest rates down to record low levels. Although several reasons have been put forward to explain the sustained weakness of the Japanese economy, none is more intriguing from the viewpoint of a central bank than the possibility that monetary policy had been largely ineffective because the Japanese economy entered a Keynesian "liquidity trap."

International financial institutions, such as the International Monetary Fund, the World Bank and the Bank for International Settlements, are important players in the global financial system. This article provides an overview of the major international financial institutions to which Canada belongs. The paper highlights their activities and the nature of Canada's involvement, including that of the Bank of Canada. Recent initiatives coming out of the Halifax and Lyon Summits to improve the effectiveness of international financial institutions are also noted.

In this paper, the author uses structural vector autoregression methodology to decompose U.S. nominal interest rates into an expected inflation component and an ex ante real interest rate component. He identifies inflation expectations and ex ante real interest rate shocks by assuming that nominal interest rates and inflation expectations move one-for-one in the long-run—they are cointegrated (1,1)—and that the real interest rate is stationary.

Canada has not been alone in making substantial progress towards price stability. Average inflation in the industrialized countries fell markedly in the first half of the 1990s, the third such episode of broad-based disinflation in the last 20 years. By the latter part of 1994, inflation in many countries had fallen to rates that had not been sustained since the early 1960s, generally converging to within a range of 1 to 3 per cent. Despite the decline in inflation to similar low levels, there were a number of interesting developments across the industrialized countries. For example, the pace of disinflation slowed noticeably after 1992 despite continued weak demand conditions. Inflation in countries that experienced a sharp depreciation in their exchange rates in the first half of the 1990s was, on average, no higher than elsewhere. The author identifies various factors affecting inflation outcomes in the industrialized countries. These include special factors, such as changes to indirect taxes, as well as more fundamental determinants of inflation, including the degree of economic slack. The presence of these factors, and perhaps the way in which inflation responded to them, varied across countries. One common element, however, was an increased commitment by monetary authorities across the industrialized economies to the goal of achieving and maintaining price stability.

In this paper the authors show how potential output can be estimated and projected through an approach derived from the structural vector autoregression methodology. This approach is applied to the Mexican economy. To identify demand, supply and world oil shocks, the authors assume that demand shocks do not have a permanent effect on output and […]