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

• 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 Research Topic(s): Central bank research, Foreign reserves management, Recent economic and financial developments 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 Research Topic(s): Monetary policy and uncertainty 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 Research Topic(s): Central bank research, Financial markets, International topics, Monetary policy framework 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 Research Topic(s): Financial institutions, Monetary policy framework 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 Research Topic(s): Inflation and prices, Inflation targets 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 Research Topic(s): Credibility, Financial stability, Inflation targets, Monetary policy framework 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 Research Topic(s): Credit and credit aggregates JEL Code(s): D, D1, D12, D14, E, E5, E51
• February 23, 2012

  Household Borrowing and Spending in Canada

  Bank of Canada Review - Winter 2011-2012 Jeannine Bailliu, Katya Kartashova, Césaire Meh

  Understanding how much of the increased debt load of Canadian households has been used to finance household spending on consumption and home renovation is important for the conduct of monetary policy. In this article, the authors use a comprehensive data set that provides information on the uses of debt by Canadian households. They first present some facts regarding the evolution of Canadian household debt over the period from 1999 to 2010, emphasizing the increased importance of debt flows that are secured by housing. They then explore how Canadian households have used their borrowed funds over the same period, and assess the role of these borrowed funds in financing total consumption and spending on home renovation. Finally, they examine the possible effects of a decline in house prices on consumption when housing equity is used as collateral against household indebtedness.

  Content Type(s): Publications, Bank of Canada Review articles Research Topic(s): Credit and credit aggregates, Domestic demand and components, Monetary policy transmission JEL Code(s): E, E2, E21, E5, E51, H, H3, H31
• May 17, 1996

  The Transmission of Monetary Policy

  Gordon Thiessen, Bruce Montador, Kevin Clinton, Kevin Fettig, Donna Howard, Charles Freedman, Pierre Duguay, Stephen S. Poloz, Tim Noël

  Text of major 1995 lecture by Bank Governor Gordon Thiessen, plus articles from Bank of Canada Review and other sources

  Content Type(s): Publications, Books and monographs Research Topic(s): Monetary policy transmission JEL Code(s): E, E5