This note presents a composite indicator of Canadian financial system vulnerabilities—the Vulnerabilities Barometer. It aims to complement the Bank of Canada’s vulnerabilities assessment by adding a quantitative and synthesized perspective to the more granular (distributional) analysis presented in the Financial System Review.
The authors study the implications of fiscal policy behaviour for sovereign risk in a framework that determines a country’s fiscal limit, the point at which, for economic or political reasons, taxes and spending can no longer adjust to stabilize debt.
The Canadian Debt Strategy Model helps debt managers determine their optimal financing strategy. The model’s code and documentation are available to the public.
Domestic public debt issued by emerging markets has risen significantly relative to international debt in recent years. Some recent empirical evidence also suggests that sovereigns have defaulted differentially on debt held by domestic and external creditors.
The stochastic simulation model suggested by Bolder (2003) for the analysis of the federal government's debt-management strategy provides a wide variety of useful information. It does not, however, assist in determining an optimal debt-management strategy for the government in its current form.
Debt strategy is defined as the manner in which a government finances an excess of government expenditures over revenues and any maturing debt issued in previous periods. The author gives a thorough qualitative description of the complexities of debt strategy analysis and then demonstrates that it is, in fact, a problem in stochastic optimal control.
The author estimates the relationship between the provincial credit ratings, as assessed by Standard & Poor's, and a number of economic variables, using the ordered probit methodology. All the variables in her estimation prove to be significant. In particular, she finds that downgrades take place at almost the same speed at different levels of the debt-to-GDP ratio, based on a pooled sample of nine provinces.