Inflation and prices

• December 23, 2004

  A Survey of the Price-Setting Behaviour of Canadian Companies

  Bank of Canada Review - Winter 2004-2005 David Amirault, Carolyn Kwan, Gordon Wilkinson

  To better understand price-setting behaviour in the Canadian economy, the Bank of Canada's regional offices surveyed a representative sample of 170 firms between July 2002 and March 2003. The authors discuss the reasons behind the survey, the methodology used to develop the questionnaire and conduct the interviews, and summarize the results. The study also assessed several explanations for holding prices steady despite market pressures for a change. The survey findings indicate that prices in Canada are relatively flexible and have become more flexible over the past decade. Price stickiness was generally found to originate in firms' fears of antagonizing customers or disturbing the goodwill or reputation developed with them. A detailed discussion of the results includes a consideration of their implications for monetary policy.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Monetary policy transmission
• November 23, 2004

  Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting

  Bank of Canada Review - Autumn 2004 Christopher Reid, Frédéric Dion, Ian Christensen

  The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Interest rates, Market structure and pricing

• Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate

  Staff Working Paper 2004-43 Ian Christensen, Christopher Reid, Frédéric Dion

  According to the Fisher hypothesis, the gap between Canadian nominal and Real Return Bond yields (or break-even inflation rate) should be a good measure of inflation expectations.

  Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, Interest rates, Market structure and pricing JEL Code(s): E, E3, E31, E4, E43

• The U.S. New Keynesian Phillips Curve: An Empirical Assessment

  Staff Working Paper 2004-35 Alain Guay, Florian Pelgrin

  The authors examine the evidence presented by Galí and Gertler (1999) and Galí, Gertler, and Lopez-Salido (2001, 2003) that the inflation dynamics in the United States can be well-described by the New Keynesian Phillips curve (NKPC).

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Inflation and prices JEL Code(s): C, C1, C13, C5, C52, E, E3, E31

• The New Keynesian Hybrid Phillips Curve: An Assessment of Competing Specifications for the United States

  Staff Working Paper 2004-31 David Dupuis

  Inflation forecasting is fundamental to monetary policy. In practice, however, economists are faced with competing goals: accuracy and theoretical consistency.

  Content Type(s): Staff research, Staff working papers Topic(s): Economic models, Inflation and prices JEL Code(s): E, E3, E31

• Exchange Rate Pass-Through and the Inflation Environment in Industrialized Countries: An Empirical Investigation

  Staff Working Paper 2004-21 Jeannine Bailliu, Eiji Fujii

  This paper investigates the question of whether a transition to a low-inflation environment, induced by a shift in monetary policy, results in a decline in the degree of pass-through of exchange rate movements to consumer prices.

  Content Type(s): Staff research, Staff working papers Topic(s): Exchange rates, Inflation and prices, International topics JEL Code(s): E, E3, E31, E4, E42, F, F3, F31
• May 22, 2004

  Exchange Rate Pass-Through in Industrialized Countries

  Bank of Canada Review - Spring 2004 Jeannine Bailliu, Hafedh Bouakez

  Economists' long-standing interest in the degree to which exchange rate movements are reflected in prices was rekindled in the 1970s by a combination of rising inflation and the adoption of more flexible exchange rate regimes in many industrialized countries. Specifically, there were concerns that a large currency depreciation could degenerate into an inflationary spiral. Such fears were curtailed in the 1980s and early 1990s as industrialized countries began to reduce and stabilize their inflation rates. The low-inflation period most industrialized countries entered approximately a decade ago coincided with significant exchange rate depreciations that had much smaller effects on consumer prices than expected. This led to a belief that the extent to which exchange rate movements are passed through to consumer prices has declined. In this article, the authors examine why pass-through could be incomplete and review empirical estimates to determine whether pass-through has indeed declined, suggesting possible reasons for this decline and discussing the implications for monetary policy.

  Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Inflation and prices, Monetary policy framework

• Estimating New Keynesian Phillips Curves Using Exact Methods

  Staff Working Paper 2004-11 Lynda Khalaf, Maral Kichian

  The authors use simple new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation.

  Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Inflation and prices JEL Code(s): C, C1, C13, C5, C52, E, E3, E31

• A Structural Small Open-Economy Model for Canada

  Staff Working Paper 2004-4 Stephen Murchison, Andrew Rennison, Zhenhua Zhu

  The authors develop a small open-economy dynamic stochastic general-equilibrium (DSGE) model in an attempt to understand the dynamic relationships in Canadian macroeconomic data.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Economic models, Inflation and prices JEL Code(s): E, E2, E3, E5, E52