E4 - Money and Interest Rates
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Three things we learned about the Lynx payment system
Canada transitioned to a new wholesale payment system, Lynx, in August 2021. Lynx is based on a real-time settlement model that eliminates credit risk in the system. This model can require more liquidity; however, Lynx’s design allows Canada’s wholesale payments to settle efficiently. -
Redefining Financial Inclusion for a Digital Age: Implications for a Central Bank Digital Currency
We explore quantitative and qualitative information about Canadians who face barriers to making digital payments. We also consider the implications of ongoing digitalization for modern financial inclusion and a potential central bank digital currency. -
Anonymous Credentials: Secret-Free and Quantum-Safe
An anonymous credential mechanism is a set of protocols that allows users to obtain credentials from an organization and demonstrate ownership of these credentials without compromising users’ privacy. In this work, we construct the first secret-free and quantum-safe credential mechanism. -
Should Banks Be Worried About Dividend Restrictions?
A regulator would want to restrict dividends to force banks to rebuild capital during a crisis. But such a policy is not time-consistent. A time-consistent policy would let banks gradually rebuild capital and pay dividends even when their equity remains below pre-crisis levels. -
Tattle-tails: Gauging downside risks using option prices
Options markets offer unique insights into the changing risks different assets face, which helps us better understand the broader risks to the Canadian economy. We show how option prices help reveal that investors did not anticipate large downside risks to either major Canadian banks or economic growth during the March 2023 financial sector system stress, a period when policy-makers and investors were unsure of what the future held for Canada’s economy. -
Forecasting Risks to the Canadian Economic Outlook at a Daily Frequency
This paper quantifies tail risks in the outlooks for Canadian inflation and real GDP growth by estimating their conditional distributions at a daily frequency. We show that the tail risk probabilities derived from the conditional distributions accurately reflect realized outcomes during the sample period from 2002 to 2022. -
A Behavioral New Keynesian Model of a Small Open Economy Under Limited Foresight
This paper studies exchange rate dynamics by incorporating bounded rationality, that is, limited foresight, in a small open-economy model. This behavior of limited foresight helps explain several observations and puzzles in the data of exchange rate movements. -
Unmet Payment Needs and a Central Bank Digital Currency
We discuss the payment habits of Canadians both in the current payment environment and in a hypothetical cashless environment. -
Is Money Essential? An Experimental Approach
Monetary theory says that money is essential if it helps to achieve better incentive-feasible outcomes. We test this in the laboratory.