Monetary Policy

Low and stable inflation allows an economy to function more effectively, contributing to sound and sustainable economic performance and increased living standards for Canadians. The Bank of Canada continues to undertake research and analysis to better understand the macroeconomic implications of monetary policy.

One near-term priority of the Bank is to improve our knowledge of the linkages between the financial system and the macroeconomy, as well as the international dimensions of these links and their implications for monetary policy. This entails building theoretical and empirical models to help policy-makers discern: (i) how external financial shocks are transmitted to Canada, (ii) how financial channels affect the international propagation of shocks, and (iii) how domestic financial developments affect the Canadian economy and the transmission of monetary policy.  We are specifically interested in the interactions between monetary policy and financial stability, and in the potential trade-offs between financial stability, price stability and other aspects of economic performance. A key goal is to understand the risks to the Canadian economy associated with the growth of household credit and the price of housing. We will also continue to analyze how the behaviour of financial institutions affects real-financial linkages.

A second area of research focuses on the monetary policy framework. Ongoing work includes: (i) analyzing the macroeconomic stabilization properties of alternative frameworks (such as nominal GDP-level targeting) complementing prior work on inflation targeting, and (ii) continuing to work on the links between monetary policy and the formation of expectations regarding inflation and output growth.

A third research goal is to improve our understanding of how international developments will affect the Canadian economy, and their implications for the conduct of Canadian monetary policy. This research agenda will include: (i) analyzing international spillovers of macroeconomic policies, (ii) enhancing our understanding and modelling of emerging-market economies - China in particular - and their influence on the global and Canadian economies, and (iii) analyzing developments in commodity markets, notably technological progress in the energy sector. We will also continue to analyze the international monetary system, particularly the evolution of global imbalances, reserve accumulation and sterilization, capital flows, exchange rate adjustment, and the role of the International Monetary Fund. This line of research will include work on the factors that determine exchange rates.

A fourth research priority is to develop new tools for analyzing the current economic environment, beginning with work on a new empirical model of the Canadian economy. The Bank will conduct further analysis of inflation and capacity pressures, particularly with a view to developing a more systematic analytical approach and better integrating financial and global developments into our monitoring. We will also continue to enhance our tools for monitoring and forecasting commodity prices.

A fifth research objective is to improve our understanding of structural issues in Canada through work on the implications of wage inequality and income and wealth distribution, as well as the effects of demographic change. We will continue to reassess estimates of potential output growth in Canada to develop further insights into the causes of Canada’s lagging productivity performance.

Financial System

An efficient and stable financial system is critical to the long-run stability and growth of the Canadian economy. It has immediate consequences for the effectiveness of monetary policy and for the Bank of Canada’s ability to fulfill its responsibilities related to the oversight of designated payment, clearing and settlement systems, as well as its roles as lender of last resort and fiscal agent for the Government of Canada. The Bank thus has a strong interest in minimizing systemic vulnerabilities and promoting the efficiency of Canada’s financial system. Research in this area aims to deepen our insight into the behaviour of financial institutions and the evolving role within the financial system of complex financial instruments, institutions, infrastructure and markets.

The first research priority related to the financial system is to assess the effectiveness of various regulatory and financial sector policy tools to achieve their objectives.  Of particular interest are the potential trade-offs between financial stability and economic growth and an evaluation of the possible unintended consequences of changes to regulatory policies.  In addition, we will consider how robust market infrastructure, as well as central bank and regulatory policies, contribute to the stability and efficiency of financial institutions and markets and to the continuous functioning of core funding markets.

A second, related research priority is to examine the behaviour of, and interactions among, financial institutions and markets. This research program will extend our macrofinancial risk-assessment framework (a macro stress-testing model) to better incorporate important interlinkages among financial institutions, markets and the macroeconomy, both domestically and internationally. This area of research will also analyze the structure and behaviour of shadow banking, as well as its implications for the overall financial sector and the macroeconomy, particularly with a view to policy conclusions. This research will also explore the link between the macroeconomic environment and risk taking.

A third research priority is to better understand how risks and vulnerabilities emerge in the financial system. This research focuses on developing relevant analytical models (such as early-warning and sectoral-vulnerability models), taking account of factors such as excess credit growth, balance-sheet imbalances and asset-price misalignments. We will also continue to investigate the nature of credit risk and foreign exchange risk.


To support the Bank of Canada’s objective of supplying Canadians with bank notes that they can use with confidence, the Bank undertakes economic and technology research on issues related to the national currency.

The major theme of the economic research that the Currency Department will undertake in 2013 is to deepen our understanding of the likely evolution of the demand for bank notes in light of ongoing developments in retail payments - in particular, the introduction of innovative retail payment products such as e-money schemes.  Our theoretical and empirical research focuses on understanding how consumers choose between various means of payment in making purchases and how they decide to adopt new payment innovations. We are also interested in studying how changes in policy and regulations, as well as other developments, will affect consumers’ choices. In addition, we will examine the potential roles of the central bank within the changing retail payments landscape.

The Bank of Canada issued the $50 and $20 bank notes in the new Polymer series in 2012; the series will be completed with the issuance of the $5 and $10 notes in 2013. The current focus of technology research is on identifying and developing new security features for a future series of bank notes and exploring contingency options to address emerging counterfeit threats. In addition, research is under way to assess the performance of the polymer notes, which will provide valuable insights for maintaining the quality of circulating currency and improving the design of future security features.

Funds Management and Banking

As fiscal agent for the Government of Canada, the Bank of Canada oversees the funding and management of Canada’s foreign exchange reserves and the federal wholesale and retail debt programs. Our research focuses on providing effective policy advice related to these activities to optimize the trade-offs between cost (or return) and risk. Another focus is the promotion of safer and more efficient payment, clearing and settlement systems.

One of the Bank’s medium-term research activities is to develop a model to optimize the allocation of assets within the Exchange Fund Account (EFA), as well as its funding strategy, to enhance our policy advice on the management of foreign reserves. After developing a single-currency model of the EFA in 2013, we will develop a multi-currency model. The objective of this work is to shed light on the risk- return trade-offs in multiple currencies to enable us to provide quantitative advice on the optimal composition of the EFA. In addition, we will investigate the trend of increased foreign investment flows into Canadian government securities and the potential impact on yields and liquidity.

A second priority is to enhance our knowledge of the risk and efficiency trade-offs in Canadian payment, clearing and settlement systems.  In 2013, we will focus on the potential risks in retail payment systems. This work will inform the governance review of the Canadian payments system that is being conducted by the Department of Finance in collaboration with the Bank of Canada. We will also deepen our understanding of the implications of recent innovations in retail payments, both for the Bank and the economy.