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  • August 23, 2003

    Bank of Canada Review - Summer 2003

    BoC Review - Summer 2003

    Cover page

    Canadian World War I War Bond

    The $100 10-year bond of the FirstWar Loan is slightly larger than a sheet of legal-sized paper. It forms part of the National Currency Collection, Bank of Canada.

    Photographed by Gord Carter, Ottawa.
    Content Type(s): Publications, Bank of Canada Review
  • August 22, 2003

    Measuring Interest Rate Expectations in Canada

    Bank of Canada Review - Summer 2003 Grahame Johnson
    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.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial markets, Interest rates
  • August 21, 2003

    Dollarization in Canada: An Update

    Bank of Canada Review - Summer 2003 John Murray, James Powell, Louis-Robert Lafleur
    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."
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rate regimes
  • May 23, 2003

    The Bank of Canada: Moving Towards Transparency

    Bank of Canada Review - Spring 2003 John Chant
    During the 1990s the Bank of Canada made several changes that transformed its conduct of monetary policy. In the 1960s and 1970s, policy decisions were made in an environment characterized by instrument opaqueness and goal opaqueness, which tended to shield the Bank's operations from scrutiny and accountability. Since the 1970s the Bank has moved towards transparency and openness by rejecting multiple policy instruments and adopting a single, well-defined goal of inflation control. A recent survey has shown that the Bank of Canada is in the middle range of central banks with regard to its transparency and has lost points for not publishing the forecasts that shape its policy or the minutes and voting records of its governing body. Chant suggests that the public has benefited significantly from the changes the Bank has made, but that it should continue to support research on the benefits of low and stable inflation and continually inform other policy-makers and the public of the results.
    Content Type(s): Publications, Bank of Canada Review articles
  • May 22, 2003

    Inflation Targeting and Medium-Term Planning: Some Simple Rules of Thumb

    Bank of Canada Review - Spring 2003 David Longworth
    Inflation targeting, a stable macroeconomic environment, and an average growth rate for potential output that is not expected to vary much in the next several years all help households, businesses, and governments in their medium-term economic and financial planning. Several simple rules of thumb can be usefully employed in this planning. Specifically, inflation targeting has maintained most major measures of inflation quite close to the target midpoint on average over a number of years. Combined with a clear fiscal framework, this has contributed to a more stable macroeconomic environment in which output varies less around its potential level. Potential output growth is expected to average around 3 per cent over the next several years. In light of these factors and historical relationships, labour income, profits, and consumer spending will likely grow, on average, by about 5 per cent over the medium term. Real and nominal long-term interest rates should also continue to be stable, with real 30-year yields varying around 3.5 or 4.0 per cent, and nominal yields varying around 5.5 or 6.0 per cent.
    Content Type(s): Publications, Bank of Canada Review articles Topic(s): Business fluctuations and cycles, Inflation targets, Inflation: costs and benefits
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