The U.S. recovery from the Great Recession has been slow relative to other postwar-era recoveries in the United States. Encouraged by loose lending standards in the pre-crisis period, U.S. households took on unsustainable amounts of debt, making them vulnerable to adverse shocks. Subsequently, a considerable drop in asset prices forced households to repair their balance sheets. While there has been progress in household deleveraging, the government sector now needs to delever, which will restrain growth over the next few years.
Topics: Business fluctuations and cycles; International topics; Recent economic and financial developmentsDuring the recent financial crisis in the U.S., banks reduced new business lending amidst concerns about borrowers’ ability to repay. At the same time, firms facing higher borrowing costs alongside a worsening economic outlook reduced investment.
Topics: Business fluctuations and cycles; Economic models; Financial stabilitySince the autumn of 1997, the regional offices of the Bank of Canada have conducted quarterly consultations with businesses across Canada. These consultations, summarized in the Business Outlook Survey (BOS), are structured around a survey questionnaire that covers topics of importance to the Bank, notably business activity, pressures on production capacity, prices and inflation, and credit conditions.
Topics: Business fluctuations and cycles; Regional economic developmentsThis paper investigates the effect of oil price uncertainty on real economic activity using a quarterly VAR with stochastic volatility in mean. Stochastic volatility allows oil price uncertainty to vary separately from changes in the level of oil prices, and thus the impact of oil price uncertainty can be examined in a more flexible yet tractable way.
Topics: Business fluctuations and cycles; Econometric and statistical methodsThis paper examines the role of bank credit in modeling and forecasting business cycle fluctuations, and investigates the international transmission of US credit shocks, using a global vector autoregressive (GVAR) framework and associated country-specific error correction models.
Topics: Business fluctuations and cycles; Credit and credit aggregates; Econometric and statistical methods; International financial marketsWe propose a drifting-coefficient model to empirically study the effect of money on output growth in Canada and to examine the role of prevailing financial conditions for that relationship. We show that such a time-varying approach can be a useful way of modelling the impact of money on growth, and can partly reconcile the lack of concensus in the literature on the question of whether money affects growth.
Topics: Business fluctuations and cycles; Credit and credit aggregates; Monetary aggregatesThe international business cycle is very important for Latin America’s economic performance as the recent global crisis vividly illustrated. This paper investigates how changes in trade linkages between China, Latin America, and the rest of the world have altered the transmission mechanism of international business cycles to Latin America.
Topics: Business fluctuations and cycles; Econometric and statistical methods; International topics; Recent economic and financial developments; Regional economic developmentsThis paper builds a two-country DSGE model to study the quantitative impact of financial frictions on business cycle co-movements when investors have foreign asset exposure. The investor in each country holds capital in both countries and faces a leverage constraint on her debt.
Topics: Business fluctuations and cycles; International financial markets; International topicshis 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.’
Topics: Asset Pricing; Business fluctuations and cyclesThis article reviews recent work that uses principal-component analysis to extract information common to indicators from the Bank of Canada’s Business Outlook Survey (BOS). The authors use correlation analysis and an out-of-sample forecasting exercise to assess and compare the information content of the principal component with that of responses to key individual survey questions on growth in real gross domestic product and in real business investment. Results suggest that summarizing the common movements among BOS indicators may provide useful information for forecasting near-term growth in business investment. For growth in real gross domestic product, however, the survey’s balance of opinion on future sales growth appears to be more informative.
Topics: Business fluctuations and cycles; Regional economic developmentsRecent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S.
Topics: Business fluctuations and cycles; Transmission of monetary policyBuilding on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we use a factor-augmented VAR (FAVAR) model with more than 260 series for 20 OECD countries to analyze how global developments affect the Canadian economy.
Topics: Business fluctuations and cycles; Econometric and statistical methods; International topicsThe authors investigate financial spillovers across countries with an emphasis on the effect of shocks to financial conditions in the United States on financial conditions and economic activity in Canada. These questions are addressed within a global vector autoregression model.
Topics: Business fluctuations and cycles; Economic models; Financial stability; International topicsThis paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada's Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions.
Topics: Business fluctuations and cycles; Economic models; International topicsThe recent global crisis was characterized by a remarkable intensity in the negative feedback process between financial sector developments and the real economy. Exceptional measures were required to break this process, and the crisis stimulated interest in the relationship between financial sector developments, the real economy, and monetary policy. The authors examine this relationship by reviewing the relevant literature and then estimating a model with Canadian data. Both theoretical models and empirical findings point to the possibility of non-linear relationships between monetary policy, financial stress, and the real economy. The research indicates that when the economy can move into different regimes of financial stress, monetary policy can influence the likelihood of moving from one regime to another. It also implies that monetary policy actions have stronger effects when financial stress is high and that the tightening of monetary policy appears to have more powerful effects than easing.
Topics: Business fluctuations and cycles; Economic models; Transmission of monetary policyThe author develops a dynamic stochastic general-equilibrium model with an active banking sector, a financial accelerator, and financial frictions in the interbank and bank capital markets.
Topics: Business fluctuations and cycles; Economic models; Financial markets; Financial stabilityThe author proposes a micro-founded framework that incorporates an active banking sector into a dynamic stochastic general-equilibrium model with a financial accelerator.
Topics: Business fluctuations and cycles; Credit and credit aggregates; Economic models; Financial stabilityToTEM – the Bank of Canada’s principal projection and policy-analysis model for the Canadian economy – is extended to include inventories. In the model, firms accumulate inventories of finished goods for their role in facilitating the demand for goods.
Topics: Business fluctuations and cycles; Economic modelsInventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output – it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance.
Topics: Business fluctuations and cycles; Transmission of monetary policyTo better understand the dynamics of the Chinese economy and its interaction with the global economy, the authors incorporate China into an existing model for the G-3 economies (i.e., the United States, the euro area, and Japan), paying particular attention to modelling the exchange rate and monetary policy in China.
Topics: Business fluctuations and cycles; Economic models; Exchange rate regimes; International topicsWhile a number of central banks publish their own business conditions indicators that rely on non-random sampling, knowledge about their statistical accuracy has been limited.
Topics: Business fluctuations and cycles; Central bank research; Regional economic developmentsThe authors use the Bank of Canada's version of the Global Economy Model, a multi-country, multi-sector dynamic stochastic general-equilibrium model with an active banking system (the BoC-GEM-FIN), to study the evolution of global current account balances following the recent global financial crisis.
Topics: Balance of payments and components; Business fluctuations and cycles; International topics; Recent economic and financial developmentsThe forecast of world economic growth plays a key role in the conduct of Canadian monetary policy. In this context, the authors study the usefulness of the monthly Purchasing Managers’ Indexes (PMIs) in predicting short-term real GDP growth in the euro area, Japan, the United Kingdom, and China, as well as in the world economy.
Topics: Business fluctuations and cycles; International topicsMany important economic variables are subject to revision. This article explains how, when, and why such revisions occur; how revisions to Canadian gross domestic product (GDP) compare with GDP revisions in some other countries; which GDP components are subject to the largest revisions; and how data revisions can affect policy decisions. The author finds that revisions to Canadian GDP tend to be smaller, on average, than those of some other countries, and that among the GDP components, exports and imports are most heavily revised.
Topics: Business fluctuations and cycles; Uncertainty and monetary policyTo complement its existing set of tools to analyze and forecast developments in the global economy, the Bank of Canada recently developed a version of the Global Projection Model (GPM) jointly with staff at the International Monetary Fund.
Topics: Business fluctuations and cycles; Economic models; International topics
