August 23, 2003 Freedman and Engert focus on the changing pattern of lending and borrowing in Canada in the past thirty to forty years, including the types of financial instruments used and the relative roles of financial institutions and financial markets. They examine how borrowing mechanisms have changed over time and consider the challenges facing the Canadian financial sector, including whether our financial markets are in danger of disappearing because of the size and pre-eminence of U.S. financial markets. Some of the trends examined here include syndicated lending, securitization, and credit derivatives, a form of financial engineering that has become increasingly important in the last few years. They also study bond and equity markets to determine whether Canadian capital markets have been hollowed out or abandoned by Canadian firms and conclude that the data do not provide much support for that view.
August 22, 2003 Financial market expectations regarding future changes in the target for the overnight rate of interest are an important source of information for the Bank of Canada. Financial markets are the mechanism through which the policy rate affects other financial variables, such as longer-term interest rates, the exchange rate, and other asset prices. An accurate measure of their expectations can therefore help policy-makers assess the potential impact of contemplated changes. Johnson focuses on the expectations hypothesis, which measures expectations of future levels of the target overnight rate as implied by current money market yields. Although expectations can be derived from the current yield on any short-term fixed-income asset, some assets have proven to be more accurate predictors than others. The implementation of a policy of fixed-announcements dates has coincided with the increased predictive power of these short-term assets. As a result of this improvement, a relatively simple model of the yield curve can now provide an accurate measure of financial market expectations.
August 21, 2003 The authors describe a special survey of the payment and financial-reporting practices of Canadian firms conducted by the Bank of Canada's regional offices to determine if the U.S. dollar has started to displace the Canadian dollar as a preferred unit of account. A cross-section of firms was asked what currency (or currencies) they used: (i) for quoting sales to Canadian customers, (ii) for quoting prices to foreigners, (iii) for reporting their financial results, and (iv) for quoting salaries and wages. The survey results reported here extend some earlier results reported in a previous Review article by Murray and Powell. The data indicate that, despite the dominance of the U.S. dollar in world trade and as an international standard of value, use of the U.S. dollar in Canada is very limited. The vast majority of Canadian firms price their products and keep their financial statements in Canadian dollars, and very few workers in Canada have their salaries paid in a foreign currency. The Canadian dollar is still strongly preferred for most pricing and financial-reporting activities in Canada, and there is very little evidence of "dollarization."