Publications

  • November 9, 1996

    Canada and international financial institutions

    International financial institutions, such as the International Monetary Fund, the World Bank and the Bank for International Settlements, are important players in the global financial system. This article provides an overview of the major international financial institutions to which Canada belongs. The paper highlights their activities and the nature of Canada's involvement, including that of the Bank of Canada. Recent initiatives coming out of the Halifax and Lyon Summits to improve the effectiveness of international financial institutions are also noted.
  • November 8, 1996

    Money markets and central bank operations: Conference summary

    This article summarizes the proceedings of a conference hosted by the Bank of Canada in November 1995. The conference examined the interaction between monetary policy operations and the money market. It provided an opportunity to assess current operations before the introduction of a large-value transfer system leads the Bank to change the techniques it uses to implement monetary policy on a day-to-day basis. From the Bank's perspective, the papers prepared externally provided some useful insights into recent innovations in money markets and their implications for the implementation of monetary policy. Meanwhile, the sessions devoted to the Bank's operations in financial markets were designed to provide market practitioners and academics with further insight into how the Bank operates in these markets.
  • August 11, 1996

    Real short-term interest rates and expected inflation: Measurement and interpretation

    This article compares different measures of real short-term interest rates for Canada over the period from 1956 to 1995. A new measure for the expected real interest rate is constructed using a proxy for inflation expectations that is based on the properties of past inflation. The history of inflation in Canada suggests that the characteristics of inflation have changed considerably over time. Past inflation can be characterized by three different types of behaviour: an environment in which average inflation is low and shocks to inflation have only temporary effects; an environment of moderate inflation with more persistent disturbances; and an environment of drifting inflation in which shocks have permanent effects on the level of inflation. The proxy for inflation expectations uses a statistical model, called a Markov Switching Model, to take account of changes in the behaviour of inflation over time. It is found that uncertainty about the changing characteristics of inflation behaviour leads to uncertainty about estimates of inflation expectations and thus about measures of real interest rates. Target ranges for keeping inflation low should help reduce the uncertainty about inflation behaviour. The behaviour of inflation and interest rates suggests that the credibility of the Bank of Canada's inflation-control objectives is growing. This should reduce inflation uncertainty and lead to lower nominal interest rates over time.
  • August 10, 1996

    Inflation expectations and Real Return Bonds

    The existence of a market for Real Return Bonds in Canada provides a direct tool with which to measure market expectations of inflation by comparing the yields on these bonds with those on conventional Government of Canada long-term bonds. However, there are other factors besides inflation expectations that may affect the yield differential. After reviewing these factors, the authors note that they can lead to a potentially large bias in the level of inflation expectations. The changes in the differential over time may, nonetheless, be a good indicator of movements in long-run inflation expectations. Based on this measure, expectations of long-run inflation have declined since late 1994.
  • May 11, 1996

    Recent developments in monetary aggregates and their implications

    In 1995, the broad aggregate M2+ grew at an annual rate of 4.5 per cent—almost twice the rate recorded in 1994—as competition from mutual funds drew less money from personal savings deposits. An adjusted M2+ aggregate, which internalizes the effect of close substitutes such as CSBs and certain mutual funds, grew by only 3.4 per cent. Gross M1 grew by 8.2 per cent during the year, reflecting an increased demand for transactions balances as market interest rates declined and as banks offered more attractive rates of interest on corporate current account balances. The robust growth of gross M1 in the second half of 1995 suggests a moderate expansion of economic activity in the first half of 1996, while moderate growth in the broad aggregates indicates a rate of monetary expansion consistent with continued low inflation. In this annual review of the monetary aggregates, the authors also introduce a new model, based on calculated deviations of M1 from its long-run demand, which suggests that inflation should remain just below the midpoint of the inflation-control target range over the next couple of years.
  • May 10, 1996

    Financing activities of provincial governments and their enterprises

    This article examines the changes that have occurred in the composition of funds raised by provincial borrowers during the 1990s. Higher financing requirements, coupled with the declining availability of funds from non-market sources such as the Canada Pension Plan, led provincial governments and their Crown corporations to broaden and to diversify their debt management programs. In particular, provincial borrowers expanded their presence in foreign bond markets, increased their issuance of floating-rate debt, and incorporated a wide variety of innovative debt instruments into their borrowing programs in order to minimize their borrowing costs and to manage the risks associated with the issuing of debt. As a result, the composition of funds raised by provincial borrowers during the 1990s differed markedly from that of the previous decade: between 1990 and 1995, provincial borrowing requirements were met almost entirely through the issuance of marketable debt, and net new foreign currency debt issues averaged nearly 50 per cent of funds raised, whereas between 1980 and 1989, non-market sources provided close to 30 per cent of funds raised, and net new foreign currency debt issues provided less than 20 per cent.