Monetary Policy

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

A 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. A key goal is to understand the risks to the Canadian economy associated with the growth of household credit and the price of housing, including the likelihood of a sudden house price correction. Particular attention will be paid to the role of demographic factors in the housing market.

A second area of research focuses on the monetary policy framework. This work includes studying (i) the optimal rate of inflation in the presence of the effective lower bound; (ii) the effectiveness of unconventional monetary policy; (iii) how best to take account of financial stability considerations in the formulation of monetary policy; and (iv) the effectiveness of forward guidance and history-dependent monetary policy.

A third research goal is to improve our understanding of how international developments affect the Canadian economy and their implications for the conduct of monetary policy. This research agenda will include (i) analyzing international spillovers of macroeconomic policies, such as the withdrawal of unconventional monetary policy measures by central banks; (ii) enhancing our understanding and modelling of emerging-market economies and their influence on the global and Canadian economies, as well as on commodity prices; (iii) analyzing developments in commodity markets, especially technological progress in the energy sector; and (iv) gaining a better understanding of some of the key forces that are shaping the structure of the global economy (e.g., trade, offshoring and globally integrated value chains). We will also continue to analyze the international monetary system, particularly how the rebalancing of global demand is evolving, reserve accumulation and sterilization, capital flows, exchange rate adjustment, and the role of the International Monetary Fund.

A fourth priority is to improve our understanding of inflation dynamics. The Bank will conduct further analysis of the forces driving subdued inflation, including inflation expectations, capacity pressures, increased retail sector competition and exchange rate pass-through. In addition, we will continue to analyze the vast quantities of digital information contained in big data to gather fresh insights for monitoring economic activity and inflation. We will also update our estimates of the CPI bias and assess the performance of our measures of underlying inflation.

A fifth research objective is to improve our understanding of ongoing structural transformations in the Canadian economy. Part of this goal is to examine export performance in the non-commodity sector, including investment in machinery and equipment, as well as developments in the energy sector, including supply constraints. The impact of China and emerging-market economies on Canada’s terms of trade and export performance will receive particular attention. We will also develop further insights into the dynamics and productivity performance of Canadian firms. We will improve our understanding of the various structural changes affecting our labour market and labour productivity - particularly the implications of demographic changes. More generally, we will continue to enhance our ability to analyze and project Canada’s potential output and the domestic and global developments affecting it.

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 implementation and 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.

A first research priority is to examine the behaviour of, and interactions among, financial institutions, markets, households and non-financial firms. This research program will increase our understanding of the important interlinkages among financial institutions, financial market infrastructures, financial markets and the Canadian economy.

A second, related research priority is to assess the evolution of the financial system in response to regulatory changes and market-led initiatives. One research line will analyze ongoing developments in Government of Canada repo and cash markets to inform broad policy questions relating to the functioning of those markets, monetary policy implementation, debt issuance and the Government of Canada yield curve. This area of research will also help the Bank to understand the effect of innovations and developments in market structure (including changes in trading technology and transparency) on financial system efficiency and stability. Another area on which we will concentrate is the ongoing regulatory reforms of financial institutions and market infrastructures.

A third research priority is to better understand how risks and vulnerabilities emerge in the financial system. Part of this research centres on developing a comprehensive, quantitative framework for the assessment of financial vulnerabilities by refining, enhancing and integrating the relevant analytical models, such as early-warning models, models of sectoral vulnerability and macro stress-testing models. We will also continue to investigate the nature of liquidity, credit risk and foreign exchange risk. Another area of interest is to extend our understanding of the effect of mortgage-lending activity and housing prices on household indebtedness and financial system vulnerabilities.


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 our economic research in 2014 is to improve our understanding of the likely evolution of the demand for bank notes, given the changes in the retail payments landscape - in particular, the introduction of innovative payment products such as e-money schemes. Our theoretical and empirical research focuses on understanding how consumers choose between various means of paying for purchases and estimating the total resource costs of using these payment instruments. We are also studying developments in digital currencies and their implications for the central bank. In addition, we will examine the potential role of the central bank with respect to the issuance and regulation of e-money.

The Bank of Canada completed the issuance of the Polymer series of bank notes in November 2013 with the launch of the $5 and $10 notes. The current focus of our technology research is on identifying and developing new security features for a future series of bank notes and exploring contingency options to address emerging counterfeiting threats. In addition, research is under way to assess the performance of the polymer notes in circulation, which will provide valuable insights for maintaining the quality of circulating currency and for improving the design of future notes and 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. The objective of our research is to provide 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, as well as its funding strategy, to enhance our policy advice on the management of foreign reserves. Research will continue in 2014 to model volatility and cash flows within this asset-allocation model.

A second priority is to improve our knowledge of the risk and efficiency trade-offs in Canadian payment clearing and settlement systems. This will involve work on a fundamental review of the payment system infrastructure with the Canadian Payments Association and continuing to deepen our understanding of the implications of recent innovations in retail payments, both for the Bank and the economy.