E - Macroeconomics and Monetary Economics

• Central Bank Communication or the Media’s Interpretation: What Moves Markets?

  Staff Working Paper 2012-9 Scott Hendry

  The goal of this paper is to investigate what type of information from Bank of Canada communication statements or the market commentary based on these statements has a significant effect on the volatility or level of returns in a short-term interest rate market.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Financial markets JEL Code(s): E, E5, E58, G, G1, G14

• A Framework to Assess Vulnerabilities Arising from Household Indebtedness Using Microdata

  Staff Discussion Paper 2012-3 Ramdane Djoudad

  Rising levels of household indebtedness have created concerns about the vulnerabilities of households to adverse economic shocks and the impact on financial stability. To assess these risks, the author presents a formal stress-testing framework that uses microdata to simulate how various economic shocks affect the distribution of the debt-service ratio (DSR) for the household sector.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Econometric and statistical methods, Financial stability JEL Code(s): C, C1, C15, C3, C31, D, D1, D14, E, E5, E51

• Short-Term Forecasting of the Japanese Economy Using Factor Models

  Staff Working Paper 2012-7 Claudia Godbout, Marco J. Lombardi

  While the usefulness of factor models has been acknowledged over recent years, little attention has been devoted to the forecasting power of these models for the Japanese economy. In this paper, we aim at assessing the relative performance of factor models over different samples, including the recent financial crisis.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, International topics JEL Code(s): C, C5, C50, C53, E, E3, E37, E4, E47

• Macroprudential Rules and Monetary Policy when Financial Frictions Matter

  Staff Working Paper 2012-6 Jeannine Bailliu, Césaire Meh, Yahong Zhang

  This paper examines the interaction between monetary policy and macroprudential policy and whether policy makers should respond to financial imbalances. To address this issue, we build a dynamic general equilibrium model that features financial market frictions and financial shocks as well as standard macroeconomic shocks.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Financial markets, Financial stability, Monetary policy framework JEL Code(s): E, E4, E42, E5, E50, E6, E60
• February 23, 2012

  What Explains Trends in Household Debt in Canada?

  Bank of Canada Review - Winter 2011-2012 Allan Crawford, Umar Faruqui

  Similar to the experiences in many other countries, household indebtedness in Canada has exhibited an upward trend over the past 30 years. Both mortgage and non-mortgage (consumer) credit have contributed to this development. In this article, the authors use microdata to highlight the main factors underlying the strong trend increase since the late 1990s. Favourable housing affordability, owing to factors such as income growth and low interest rates, has supported significant increases in home-ownership rates and mortgage debt. Much of the rise in consumer credit has been facilitated by higher housing values (used as collateral for loans) and financial innovation that makes it easier for households to access this credit.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credit and credit aggregates JEL Code(s): D, D1, D12, D14, E, E5, E51
• February 23, 2012

  Household Borrowing and Spending in Canada

  Bank of Canada Review - Winter 2011-2012 Jeannine Bailliu, Katya Kartashova, Césaire Meh

  Understanding how much of the increased debt load of Canadian households has been used to finance household spending on consumption and home renovation is important for the conduct of monetary policy. In this article, the authors use a comprehensive data set that provides information on the uses of debt by Canadian households. They first present some facts regarding the evolution of Canadian household debt over the period from 1999 to 2010, emphasizing the increased importance of debt flows that are secured by housing. They then explore how Canadian households have used their borrowed funds over the same period, and assess the role of these borrowed funds in financing total consumption and spending on home renovation. Finally, they examine the possible effects of a decline in house prices on consumption when housing equity is used as collateral against household indebtedness.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credit and credit aggregates, Domestic demand and components, Monetary policy transmission JEL Code(s): E, E2, E21, E5, E51, H, H3, H31

• Why Is Cash (Still) So Entrenched? Insights from the Bank of Canada’s 2009 Methods-of-Payment Survey

  Staff Discussion Paper 2012-2 Carlos Arango, Dylan Hogg, Alyssa Lee

  The authors present key insights from the Bank of Canada’s 2009 Methods-of-Payment survey. In the survey, about 6,800 participants completed a questionnaire with detailed information regarding their personal finances, as well as their use and perceptions of different payment methods.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Bank notes, Financial services JEL Code(s): D, D1, D12, E, E4, E41, L, L8, L81

• An International Dynamic Term Structure Model with Economic Restrictions and Unspanned Risks

  Staff Working Paper 2012-5 Gregory Bauer, Antonio Diez de los Rios

  We construct a multi-country affine term structure model that contains unspanned macroeconomic and foreign exchange risks. The canonical version of the model is derived and is shown to be easy to estimate.

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Exchange rates, Interest rates JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12, G15

• Fooled by Search: Housing Prices, Turnover and Bubbles

  Staff Working Paper 2012-3 Brian Peterson

  his paper develops and estimates a model to explain the behaviour of house prices in the United States. The main finding is that over 70% of the increase in house prices relative to trend during the increase of house prices in the United States from 1995 to 2006 can be explained by a pricing mechanism where market participants are ‘Fooled by Search.’

  Content Type(s): Staff research, Staff working papers Topic(s): Asset pricing, Business fluctuations and cycles JEL Code(s): E, E3, R, R2, R21

• A Foreign Activity Measure for Predicting Canadian Exports

  Staff Discussion Paper 2012-1 Louis Morel

  The author constructs a measure of foreign activity that takes into account the composition of foreign demand for Canadian exports. It has a number of interesting features.

  Content Type(s): Staff research, Staff discussion papers Topic(s): Balance of payments and components, Exchange rates, Recent economic and financial developments JEL Code(s): E, E0, E00, F, F1, F17