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This article examines three shocks that affected Canada's economy over the past year from a regional perspective. The downturn in the U.S. economy, high energy prices, and low lumber prices affected Canada's regions to varying degrees. The relative size of the various economic sectors in each region is important in determining the intensity of a region's response to an economic shock. The article presents some stylized facts on the sectoral mix of each region followed by an analysis of the effects of the three shocks on the regional economies. An outlook is presented, which highlights the results of the survey by the Bank's regional offices in the summer of 2001.

This article summarizes the proceedings of an international research conference hosted by the Bank of Canada in November 2000. The conference marked the fiftieth anniversary of Canada's adoption of a flexible exchange rate, and its title recognizes the seminal contribution of Professor Milton Friedman's article "The Case for Flexible Exchange Rates." His keynote address to the conference is also summarized in the article. The conference papers re-examine many of the arguments raised by Friedman using recent developments in economic theory and econometric techniques. They investigate the experience of a wide range of industrialized and emerging-market economies. The main findings are that a strong case can be made for flexible exchange rates in economies that are large commodity exporters and that have credible low-inflation monetary policies and relatively well-developed financial systems.

Over the past year and a half, the Bank of England and the Bank of Canada have been developing a framework for the resolution of international financial crises that aligns incentives for all parties to deal with a crisis and preserve the integrity of the international financial system. The framework is built on principles, not rules.

This paper examines whether restructuring in the public sector contributed to the slower cyclical recovery in Canada than in the United States during the 1990s. Changes in public sector employment are used to investigate this question.

This paper evaluates the forecasting performance of factor models for Canadian inflation. This type of model was introduced and examined by Stock and Watson (1999a), who have shown that it is quite promising for forecasting U.S. inflation.

It is commonly observed that central banks respond gradually to economic shocks, moving the interest rate in small discrete steps in the same direction over an extended period of time. This paper examines the empirical evidence regarding central banks' smoothing of interest rates, paying particular attention to the case of Canada.

This paper surveys recent developments in the theoretical and empirical literature on the economic implications of uncertainty about the longer-term outlook for inflation. In particular, the linkages between inflation, long-run inflation uncertainty, and aggregate economic activity in industrial economies have become considerably better understood during the past decade.

Affine models describe the stylized time-series properties of the term structure of interest rates in a reasonable manner, they generalize relatively easily to higher dimensions, and a vast academic literature exists relating to their implementation. This combination of characteristics makes the affine class a natural introductory point for modelling interest rate dynamics.

The substantial growth in wealth over the course of the second half of the 1990s generated the equivalent of a certain level of savings, while simultaneously causing household savings rates to fall significantly. The author seeks to explain this decline in savings, observed since 1995, using the methodology developed by King, Plosser, Stock, and Watson (1991).

In this article the author examines the effects that major changes in energy prices in recent years have had on inflation and on the pace of economic expansion. These are then compared with the effects of the oil-price shocks that occurred in the 1970s and early 1980s. Changes in the intensity of energy use are examined, as well as developments in Canada's merchandise trade surplus in energy commodities and products. The author also considers the effects that a monetary policy anchored to low and stable inflation could have on price-setting behaviour and thus on the pass-through of higher energy costs to core inflation in Canada and in other industrial countries.