Optimal Monetary Policy during Endogenous Housing-Market Boom-Bust Cycles Staff Working Paper 2009-32 Hajime Tomura This paper uses a small-open economy model for the Canadian economy to examine the optimal Taylor-type monetary policy rule that stabilizes output and inflation in an environment where endogenous boom-bust cycles in house prices can occur. Content Type(s): Staff research, Staff working papers Topic(s): Credit and credit aggregates, Financial stability, Inflation targets JEL Code(s): E, E4, E44, E5, E52
Measures of Aggregate Credit Conditions and Their Potential Use by Central Banks Staff Discussion Paper 2009-12 Alejandro García, Andrei Prokopiw Understanding the nature of credit risk has important implications for financial stability. Since authorities – notably, central banks – focus on risks that have systemic implications, it is crucial to develop ways to measure these risks. Content Type(s): Staff research, Staff discussion papers Topic(s): Credit and credit aggregates, Financial markets, Financial stability JEL Code(s): G, G1, G10, G12, G13
Bond Liquidity Premia Staff Working Paper 2009-28 Jean-Sébastien Fontaine, René Garcia Recent asset pricing models of limits to arbitrage emphasize the role of funding conditions faced by financial intermediaries. In the US, the repo market is the key funding market. Then, the premium of on-the-run U.S. Treasury bonds should share a common component with risk premia in other markets. Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Financial stability JEL Code(s): E, E4, E43, H, H1, H12
September 11, 2009 Bank of Canada Liquidity Actions in Response to the Financial Market Turmoil Bank of Canada Review - Autumn 2009 Lorie Zorn, Carolyn A. Wilkins, Walter Engert In response to the financial crisis of 2007-09, the Bank of Canada intervened repeatedly to stabilize the financial system and limit the repercussions of the crisis on the Canadian economy. This article reviews the extraordinary liquidity measures taken by the Bank during this period and the principles that guided the Bank's interventions. A preliminary assessment of the term liquidity facilities provided by the Bank suggests that they were an important source of liquidity support for some financial institutions and, on a broader basis, served to reduce uncertainty among market participants about the availability of liquidity, as well as helping to promote a return to well-functioning money markets. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial markets, Financial stability
September 11, 2009 Understanding Corporate Bond Spreads Using Credit Default Swaps Bank of Canada Review - Autumn 2009 Alejandro García, Jun Yang Corporate bond spreads worldwide have widened markedly since the beginning of the credit crisis in 2007. This article examines default and liquidity risk–the main components of the corporate bond spread–for Canadian firms that issue bonds in the U.S. market, focusing in particular on their evolution during the credit crisis. They find that, during this period, the liquidity component increased more for speculative-grade bonds than it did for investment-grade bonds, consistent with a "flight-to-quality" phenomenon. An important implication of their results for policy-makers seeking to address problems in credit markets is that the liquidity risk in corporate spreads for investment and speculative bonds behaves differently than the default risk, especially during crisis episodes. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Econometric and statistical methods, Financial markets, Financial stability
Household Debt, Assets, and Income in Canada: A Microdata Study Staff Discussion Paper 2009-7 Césaire Meh, Yaz Terajima, David Xiao Chen, Thomas J. Carter The authors use microdata from the 1999 and 2005 Surveys of Financial Security to identify changes in household debt, and discuss their potential implications for monetary policy and financial stability. They document an increase in the debt-income ratio, which rose from 0.75 to 0.95, on average. Content Type(s): Staff research, Staff discussion papers Topic(s): Credit and credit aggregates, Financial stability, Productivity, Sectoral balance sheet JEL Code(s): E, E2, E21, E24
June 11, 2009 The Complexities of Financial Risk Management and Systemic Risks Bank of Canada Review - Summer 2009 Frank Milne Risk-management systems in financial institutions have come under increasing scrutiny in light of the current financial crisis, resulting in calls for improvements and an increased role for regulators. Yet such objectives miss the intricacy at the heart of the risk-management process. This article outlines the complexity inherent in any modern risk-management system, which arises because there are shortcuts in the theoretical models that risk managers need to be aware of, as well as the difficulties in sensible calibration of model parameters. The author suggests that prudential regulation of such systems should focus on failures within the financial firm and in the market interactions between firms and reviews possible strategies that can improve the performance of risk management and microprudential regulatory practice. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial institutions, Financial stability, Financial system regulation and policies
Simulations du ratio du service de la dette des consommateurs en utilisant des données micro Staff Working Paper 2009-18 Ramdane Djoudad The author constructs a formal analytic framework to simulate the impact of various economic shocks on the household debt-service ratio, using data from the Canadian Financial Monitor (CFM) survey. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial stability JEL Code(s): C, C1, C15, C3, C31, D, D1, D14, E, E5, E51
Heterogeneous Beliefs and Housing-Market Boom-Bust Cycles in a Small Open Economy Staff Working Paper 2009-15 Hajime Tomura This paper introduces heterogeneous beliefs among households in a small open economy model for the Canadian economy. The model suggests that simultaneous boom-bust cycles in house prices, output, investment, consumption and hours worked emerge when credit-constrained mortgage borrowers expect that future house prices will rise and this expectation is neither shared by savers nor realized ex-post. Content Type(s): Staff research, Staff working papers Topic(s): Credit and credit aggregates, Financial stability, Inflation targets JEL Code(s): E, E4, E44, E5, E52
Testing for Financial Contagion with Applications to the Canadian Banking System Staff Working Paper 2009-14 Fuchun Li The author proposes a new test for financial contagion based on a non-parametric measure of the cross-market correlation. The test does not depend on the assumption that the data are drawn from a given probability distribution; therefore, it allows for maximal flexibility in fitting into the data. Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Econometric and statistical methods, Financial stability JEL Code(s): C, C1, C12, G, G0, G01, G1, G15