E44 - Financial Markets and the Macroeconomy
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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. -
It takes a panel to predict the future: What the stock market says about future economic growth in Canada
Valuation ratios in the Canadian stock market can help reveal investors’ expectations about future economic growth because the impact of economic growth on valuation ratios can vary across industries. We find that this variation helps produce accurate forecasts of future growth of real gross domestic product in Canada. The forecasts from our model declined by just over 3 percentage points between January 2022 and February 2023—a period when the Bank of Canada rapidly increased the overnight rate. As well, we find that interest-rate-sensitive industries had an outsized contribution to this expected slowdown in growth. -
Monetary Policy Transmission, Bank Market Power, and Wholesale Funding Reliance
I study how banking market concentration and reliance on wholesale funding affect monetary policy transmission to mortgage rates. I find that this transmission is imperfect and dampens the response of consumption, output, and housing prices. -
A Review of the Bank of Canada’s Support of Key Financial Markets During the COVID-19 Crisis
The COVID-19 pandemic placed unprecedented strain on the global financial system. We describe how the Bank of Canada responded to the rapidly deteriorating liquidity in core Canadian fixed-income markets. -
Narrative-Driven Fluctuations in Sentiment: Evidence Linking Traditional and Social Media
News media present competing interpretations of what breaking news implies for the macroeconomy. Recent examples include news reporting on high inflation and yield curve inversions. Do these narratives shape macroeconomic sentiment? In this paper, we highlight the importance of narratives using evidence linking traditional media and social media. -
The Impact of Unemployment Insurance and Unsecured Credit on Business Cycles
This paper studies how unsecured consumer credit impacts the extent to which unemployment insurance (UI) policies smooth aggregate consumption fluctuations over the business cycle. Using a general equilibrium real business cycle model, I find that unsecured credit amplifies the extent to which UI smooths cyclical consumption fluctuations. -
Introducing the Bank of Canada’s Market Participants Survey
The Market Participants Survey (MPS) gathers financial market participants’ expectations for key macroeconomic and financial variables and for monetary policy. This staff analytical note describes the MPS’s objectives and main features, its process and design, and how Bank of Canada staff use the results. -
Stress Relief? Funding Structures and Resilience to the Covid Shock
Funding structures affected the amount of financial stress different countries and sectors experienced during the spread of COVID-19 in early 2020. Policy responses targeting specific vulnerabilities were more effective at mitigating this stress than those supporting banks or the economy more broadly.