E3 - Prices, Business Fluctuations, and Cycles

• 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 Topic(s): Inflation targets, Labour markets, Monetary policy, Monetary policy framework JEL Code(s): E, E3, E31, E5, E52, J, J2, J20

• 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 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 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 Topic(s): Business fluctuations and cycles, Economic models JEL Code(s): E, E2, E20, E3, E32, F, F4, F44

• Small and smaller: How the economic outlook of small firms relates to size

  Staff Analytical Note 2021-14 Chris D'Souza, James Fudurich, Farrukh Suvankulov

  Firms with fewer than 100 workers employ about 65 percent of the total labour force in Canada. An online survey experiment was conducted with firms of this size in Canada in 2018–19. We compare the responses of small and micro firms to explore how their characteristics and economic outlooks relate to their size.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Business fluctuations and cycles, Firm dynamics JEL Code(s): C, C8, C83, D, D2, D22, E, E3, E32