E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit

• November 13, 2014

  Recent Developments in Experimental Macroeconomics

  Bank of Canada Review - Autumn 2014 Robert Amano, Oleksiy Kryvtsov, Luba Petersen

  This article describes experimental economics, in general, and new developments in experimental macroeconomics, in particular. The approach has a clear niche in providing evidence on economic phenomena that cannot be observed directly or that are difficult to measure. Experimental work conducted by Bank of Canada economists has shed light on a number of issues important to monetary policy, such as the relative efficacy between price-level and inflation targeting, and the nature of inflation expectations formation.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): C, C9, E, E3, E31, E5, E52
• November 13, 2014

  Should Forward Guidance Be Backward-Looking?

  Bank of Canada Review - Autumn 2014 Rhys R. Mendes, Stephen Murchison

  When constrained by the zero lower bound, some central banks have communicated a threshold that must be met before short-term interest rates would be permitted to rise. Simulation results for Canada show that forward guidance that is conditional on achieving a price-level threshold can theoretically raise demand and inflation expectations by significantly more than unemployment thresholds. This superior performance is attributable to the fact that the price-level threshold depends on past inflation outcomes. In practice, however, history-dependent thresholds such as this might be more challenging for central banks to communicate.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E52, E58
• November 13, 2014

  Spillover Effects of Quantitative Easing on Emerging-Market Economies

  Bank of Canada Review - Autumn 2014 Robert Lavigne, Subrata Sarker, Garima Vasishtha

  While quantitative easing (QE) in the United States likely increased capital flows to emerging-market economies (EMEs), putting upward pressure on asset prices and exchange rates, diverging fundamentals between advanced economies and EMEs were also important drivers. Evidence suggests that the benefits of QE to EMEs, in higher global demand and increased confidence, appear to outweigh the costs. When advanced economies begin to normalize monetary policy, the best defence for EMEs against any potential instability is likely to be further strengthening of their macroeconomic and financial policy frameworks.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E52, E58, F, F3, F32, F4, F41, F42
• May 13, 2014

  The Canadian Dollar as a Reserve Currency

  Bank of Canada Review - Spring 2014 Lukasz Pomorski, Francisco Rivadeneyra, Eric Wolfe

  This article provides an overview of the growth of Canadian-dollar-denominated assets in official foreign reserves. Based on International Monetary Fund data and on internal Bank of Canada analysis, we estimate that the total reserve holdings of Canadian-dollar assets increased from negligible levels before 2008 to around US$200 billion in the third quarter of 2013. We discuss the determinants of this increase, as well as its potential impact on Canadian debt markets, for example, lower yields and therefore reduced financing costs for the Government of Canada, and the possible negative impact on market liquidity.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E58, F, F3, F31, G, G1, G12
• May 13, 2014

  Measuring Uncertainty in Monetary Policy Using Realized and Implied Volatility

  Bank of Canada Review - Spring 2014 Bo Young Chang, Bruno Feunou

  Uncertainty surrounding the Bank of Canada’s future policy rates is measured using implied volatility computed from interest rate options and realized volatility computed from intraday prices of interest rate futures. Both volatility measures show that uncertainty decreased following major policy actions taken by the Bank in response to the 2007–09 financial crisis. Findings also indicate that, on average, uncertainty decreases following the Bank’s policy rate announcements.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E52, E58
• May 16, 2013

  Unconventional Monetary Policies: Evolving Practices, Their Effects and Potential Costs

  Bank of Canada Review - Spring 2013 Lena Suchanek, Eric Santor

  Following the recent financial crisis, major central banks have introduced several types of unconventional monetary policy measures, including liquidity and credit facilities, asset purchases and forward guidance. To date, these measures appear to have been successful. They restored market functioning, facilitated the transmission of monetary policy and supported economic activity. They have potential costs, however, including challenges related to the greatly expanded balance sheets of central banks and the eventual exit from these measures, as well as the vulnerabilities that can arise from prolonged monetary accommodation.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E52, E58, E6, E65
• November 15, 2012

  Monetary Policy and the Risk-Taking Channel: Insights from the Lending Behaviour of Banks

  Bank of Canada Review - Autumn 2012 Teodora Paligorova, Jesus Sierra

  The financial crisis of 2007-09 and the subsequent extended period of historically low real interest rates have revived the question of whether economic agents are willing to take on more risk when interest rates remain low for a prolonged time period. This increased appetite for risk, which causes economic agents to search for investment assets and strategies that generate higher investment returns, has been called the risk-taking channel of monetary policy. Recent academic research on banks suggests that lending policies in times of low interest rates can be consistent with the existence of a risk-taking channel of monetary policy in Europe, South America, the United States and Canada. Specifically, studies find that the terms of loans to risky borrowers become less stringent in periods of low interest rates. This risk-taking channel may amplify the effects of traditional transmission mechanisms, resulting in the creation of excessive credit.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E5, E58, G, G2, G21
• August 16, 2012

  Measurement Bias in the Canadian Consumer Price Index: An Update

  Bank of Canada Review - Summer 2012 Patrick Sabourin

  The consumer price index (CPI) is the most commonly used measure to track changes in the overall level of prices. Since it departs from a true cost-of-living index, the CPI is subject to four types of measurement bias—commodity substitution, outlet substitution, new goods and quality adjustment. The author updates previous Bank of Canada estimates of measurement bias in the Canadian CPI by examining these four sources of potential bias. He finds the total measurement bias over the 2005–11 period to be about 0.5 percentage point per year, consistent with the Bank’s earlier findings. Slightly more than half of this bias is caused by the fixed nature of the CPI basket of goods and services.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E3, E31, E5, E52
• May 17, 2012

  Inflation Targeting: The Recent International Experience

  Bank of Canada Review - Spring 2012 Robert Lavigne, Rhys R. Mendes, Subrata Sarker

  In the years since the 2006 renewal of Canada’s inflation-control agreement, monetary policy regimes have faced significant shocks, including the global economic and financial crisis. This article reviews the recent experience with inflation targeting, including the debate about the appropriate role of monetary policy in maintaining financial stability. In the aftermath of the crisis, both […]

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): E, E3, E31, E5, E52, E58
• February 23, 2012

  What Explains Trends in Household Debt in Canada?

  Bank of Canada Review - Winter 2011-2012 Allan Crawford, Umar Faruqui

  Similar to the experiences in many other countries, household indebtedness in Canada has exhibited an upward trend over the past 30 years. Both mortgage and non-mortgage (consumer) credit have contributed to this development. In this article, the authors use microdata to highlight the main factors underlying the strong trend increase since the late 1990s. Favourable housing affordability, owing to factors such as income growth and low interest rates, has supported significant increases in home-ownership rates and mortgage debt. Much of the rise in consumer credit has been facilitated by higher housing values (used as collateral for loans) and financial innovation that makes it easier for households to access this credit.

  Content Type(s): Publications, Bank of Canada Review articles JEL Code(s): D, D1, D12, D14, E, E5, E51