Bank of Canada Review Article

  • December 9, 1994

    The term structure of interest rates as a leading indicator of economic activity: A technical note

    The spread between long-term and short-term interest rates has proven to be an excellent predictor of changes of economic activity in Canada. As a general rule, when long-term interest rates have been much above short-term rates, strong increases in output have followed within about a year; however, whenever the yield curve has been inverted for any extended period of time, a recession has followed. Similar findings exist for other countries, including the United States. But although Canadian and U.S. interest rates generally move quite closely together, the Canadian yield curve has been distinctly better at predicting future Canadian output. The explanation given for this result is that the term spread has reflected both current monetary conditions, which affect short-term interest rates, and expected real returns on investment and expectations of inflation, which are the main determinants of long-term rates. This article is mainly a summary of econometric work done at the Bank. It also touches on some of the extensive recent literature in this area.
  • December 8, 1994

    Some macroeconomic implications of rising levels of government debt

    The level of government debt in Canada relative to gross domestic product has risen steadily since the mid-1970s. Canada has not been alone in experiencing rising government indebtedness, but in comparison to other countries, Canada's debt load is now distinctly on the high side. The author reviews some of the effects of rising government debt levels on macroeconomic performance and provides some calculations aimed at illustrating their possible long-run impact on the Canadian economy. His analysis, which is based on a model of the Canadian economy used at the Bank of Canada, suggests that higher levels of government debt reduce both the level of output and the share of output that is available for domestic consumption. The central policy implication is that there are substantial benefits to halting the rise in government debt and thus preventing further erosion of consumption opportunities.
  • December 7, 1994

    Repo, reverse repo and securities lending markets in Canada

    Repurchase agreements (repos), reverse repos and securities lending markets permit a variety of institutions to conduct a broad range of financial transactions efficiently. In addition, they allow financial market participants to augment the returns on their cash holdings and securities portfolios. Canadian repo and securities lending markets have grown rapidly in recent years, following the expansion of such markets in major financial centres around the world; the volume of transactions in Canada now averages between $35 billion and $50 billion per day. The author notes that structural and regulatory changes in Canada have played important roles in promoting this growth. The vast majority of repo and securities lending transactions involve securities issued by the Government of Canada—principally Government of Canada bonds.
  • November 9, 1994

    The Bank of Canada's new Quarterly Projection Model (QPM): An introduction

    This article provides an overview of the Bank of Canada's new economic model, the Quarterly Projection Model (QPM), which has been under development at the Bank since 1989. The model has two roles. It is used to make economic projections, which are conducted quarterly and form an important basis for discussions of monetary policy between staff and senior management. QPM is also a research tool: it was developed to analyse important changes to the economy or macroeconomic policies which require a deeper understanding of long-term economic forces. The model pays particular attention to factors shaping long-term equilibrium, such as stocks of wealth, capital, government debt and net foreign assets. Various sources of dynamics, including the adjustment of forward-looking expectations, operate to determine the transition path to equilibrium and the consistency of expectations. The article discusses the history of QPM and earlier economic models at the Bank, and provides a simple overview of how the model works.
  • November 8, 1994

    The demand for currency and the underground economy

    The underground economy in Canada has attracted increased attention over the past few years, yet there is no precise way to measure its size. Recent estimates vary between 4 per cent and 15 per cent of gross domestic product. This article provides an overview of measurement issues and recent estimates. It then focusses on the "monetary" approach to estimating the size of the underground economy. This approach is based on the assumption that the demand for bank notes provides a clue as to the size of the underground economy. The article concludes that estimates that use this approach must be viewed with considerable caution. They are based on a number of assumptions that are difficult to verify and that significantly affect the results.
  • November 7, 1994

    The use of Canadian bank notes

    This article delves into the microeconomics of note circulation, reviewing main factors affecting the demand for bank notes over the last 50 years, including new technology such as automated banking machines. It also discusses trends in the average value of notes in circulation and in the demand for notes of different denominations.
  • June 1, 1994

    Summer 1994

    Canada's net external indebtedness increased from $110 billion in 1980 to $313 billion in 1993, reflecting the accumulation of current account deficits over many years.

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