One of the most important factors that must be considered if countries are thinking about lowering the target level of inflation much below 2 per cent is the zero interest bound. Targeting inflation rates that are too low, the authors note, may restrict the ability of monetary policy to respond to economic shocks by limiting the amount by which interest rates can be eased. The size of the shocks hitting an economy, the formation of inflation expectations, and the conduct of monetary policy are also seen to exert an important influence on the risks of hitting the zero interest bound. The evidence that the authors review suggests that the probability of encountering the zero bound when the average inflation is at least 2 per cent are relatively small.
Topics: Inflation: costs and benefits; Interest rates; Monetary policy implementationThe primary objective of this paper is to compare a variety of joint models of the term structure of interest rates and the macroeconomy.
Topics: Econometric and statistical methods; Financial markets; Interest ratesUnder bond-rate transmission of monetary policy, the authors show that a generalized Taylor Principle applies, in which the average anticipated path of policy responses to inflation is subject to a lower bound of unity. This result helps explain how bond rates may exhibit stable responses to inflation, even in periods of passive policy.
Topics: Interest rates; Transmission of monetary policyDifferences in market structures may affect the manner in which fundamental information is incorporated into prices. High levels of quote and trade transparency plus substantial quoting obligations in European government securities markets ensure that prices are informationally efficient.
Topics: Financial markets; Interest rates; Market structure and pricingWe study the joint dynamics of macroeconomic variables, bond yields, and the exchange rate in an empirical two-country New-Keynesian model complemented with a no-arbitrage term structure model. With Canadian and US data, we are able to study the impact of macroeconomic shocks from both countries on their yield curves and the exchange rate.
Topics: Debt Management; Econometric and statistical methods; Exchange rates; Financial markets; Interest ratesThe authors assess the performance of the Canadian economy under a variety of interest rate rules when the zero bound on nominal interest rates can bind. Their assessment is based on numerical simulations of a dynamic stochastic general-equilibrium model in a stochastic environment. Consistent with the literature, the authors find that the probability and consequences [...]
Topics: Inflation: costs and benefits; Interest rates; Monetary policy frameworkOver the past 15 years, long-term interest rates have declined to levels not seen since the 1970s. This paper explores possible shifts in global savings and investment that have led to this fall in the world real interest rate.
Topics: Interest rates; International topicsLoan-level data on the uncollateralized overnight loan market is generated using payment data from Canada's Large Value Transfer System (LVTS) and a modified version of the methodology proposed in Furfine (1999). There were on average just under 100 loans extended in this market each day from March 2004 to March 2006 for a total daily value of about $5 billion.
Topics: Financial markets; Interest rates
