What happens after Governing Council sets the policy interest rate: Inside the implementation framework that makes monetary policy work Staff analytical paper 2026-45 Kaetlynd McRae Setting the target rate is the most visible part of monetary policy, but the monetary policy implementation framework is what helps ensure that decision is reflected in financial markets. Through the design and use of its tools and facilities, the Bank of Canada helps keep short-term market interest rates close to the policy target, while preserving incentives for market participants to trade and actively manage liquidity. Content Type(s): Staff research, Staff analytical paper JEL Code(s): E, E4, E41, E42, E5, E51, E52, E58 Research Theme(s): Financial markets and funds management, Funds management, Monetary policy, Monetary policy framework and transmission, Monetary policy tools and implementation, Money and payments, Payment and financial market infrastructures
Liquidity Optimization in Gross Settlement Systems with Quantum Reordering: Application to TARGET2∗ Staff working paper 2026-32 Valerio Astuti, Adriano Baldeschi, Luca Bastianelli, Giuseppe Bruno, Riccardo Russo, Ajit Desai, Danica Marsden Building on our earlier quantum algorithm, this paper shows that reordering queued payments can significantly reduce liquidity needs. The algorithm performs well on smaller payment batches, while traditional algorithms can process larger batches and deliver greater savings. Machine learning also helps identify which payment patterns offer the greatest potential for improvement. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C6, C61, C63, C8, C83, E, E4, E42, E5, E58 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Money and payments, Payment and financial market infrastructures
Climate Change and Monetary Policy: Navigating Physical Risks Staff analytical paper 2026-44 Tatjana Dahlhaus Weather-related disasters can reduce output while increasing inflation, creating difficult trade-offs for monetary policy. This note reviews evidence on the macroeconomic effects of physical climate risks and uses a structural model to assess how more frequent and severe disasters could shape future monetary policy challenges. Content Type(s): Staff research, Staff analytical paper JEL Code(s): C, C6, C68, E, E1, E12, E3, E31, E5, E52, F, F4, F41, Q, Q5, Q54 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Structural challenges, Climate change
Segmented Inflation Dynamics (SID): Identifying Trend Inflation from the Price Index Staff analytical paper 2026-43 André Binette, Colleen Smith This note presents Segmented Inflation Dynamics (SID), a data-driven tool for assessing trend inflation. SID uses time-series segmentation to divide the price index into contiguous segments with stable inflation rates. Based on data through December 2025, SID indicates that Canada’s trend inflation has been near 2 percent since early 2024. Content Type(s): Staff research, Staff analytical paper JEL Code(s): C, C2, C22, E, E3, E31, E5, E52 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Monetary policy, Inflation dynamics and pressures
Balancing the Canadian Repo Market through QT: The Diminishing Role of Settlement Balances Staff analytical paper 2026-40 Evan Dudley, Jean-Sébastien Fontaine, Dimitri Hadjistavropoulos, Neil Maru, Sofia Tchamova, Andreas Uthemann, Jun Yang Repo market imbalances can be large and persistent, and can lift the cost of short-term funding in Canada, including the CORRA benchmark. Banks’ holdings of settlement balances absorbed most of the repo imbalances during QE, but have become far less central by the end of QT. Content Type(s): Staff research, Staff analytical paper JEL Code(s): E, E5, E52, E58 Research Theme(s): Financial system, Financial institutions and intermediation, Monetary policy, Monetary policy tools and implementation
Time Use and Consumption Expenditures Staff working paper 2026-29 Daniela Hauser, Stefano Gnocchi, Laure Simon This paper shows that consumption activities toward which households reallocate more time in recessions see larger expenditure declines, revealing a systematic link between time-use and expenditure cyclicality. A two-sector New Keynesian model shows this time-expenditure substitution explains roughly forty percent of consumption's response to monetary policy shocks. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D1, D12, E, E2, E21, E3, E32, E5, E52, J, J2, J22 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission
How Do Interest Rates Spur the Housing Market: Exploring Nonlinear Effects Staff analytical paper 2026-35 Benjamin Straus, Stéphane Surprenant, Kerem Tuzcuoglu In this note we examine how monetary policy affects housing demand, supply and prices in Canada, and whether these effects vary with labour market conditions Content Type(s): Staff research, Staff analytical paper JEL Code(s): C, C3, C32, E, E5, E52, R, R3, R31 Research Theme(s): Monetary policy, Monetary policy framework and transmission
Balancing Act: Monetary Policy Responses to Natural Disasters Staff working paper 2026-28 Tatjana Dahlhaus, Alexander Ueberfeldt, Malik Shukayev Natural disasters can create important challenges for monetary policy in resource-rich small open economies. Using a DSGE model calibrated to Canada, we show that most disasters operate as adverse supply shocks, lowering output and raising inflation, thereby creating a trade-off for monetary policy. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C1, C11, C3, C32, D, D6, D63, E, E5, E52, Q, Q5, Q54 Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Structural challenges, Climate change
Monetary Policy in an AI-Driven Two-Speed Economy Staff working paper 2026-27 Joshua Brault, Maryam Haghighi, Jing Yang We analyze monetary policy responses to AI in a two-sector New Keynesian model, distinguishing augmentation and automation. Both reduce labor demand, requiring accommodation that creates inflation trade-offs. Automation worsens them. Aggregate inflation depends on AI’s form and breadth, making policy stabilization more complex and aggregate data potentially misleading. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E24, E3, E31, E32, E5, E52, J, J2, J23, O, O3, O33 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Structural challenges, Digitalization and productivity
Monetary Policy Challenges in a Volatile World Staff analytical paper 2026-34 Stefano Gnocchi, Matteo Cacciatore Rising volatility and structural shifts—deglobalization, climate risks, and AI—are reshaping inflation and policy trade-offs. Evidence suggests central banks can accommodate supply-driven inflation while balancing inflation and output, as long as expectations stay anchored and policy reflects shock size, persistence, and broader economic conditions. Content Type(s): Staff research, Staff analytical paper JEL Code(s): E, E3, E31, E32, E5, E52, E58 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Structural challenges, Climate change, International trade, finance and competitiveness