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The Bank of Canada's New Quarterly Projection Model, Part 3. The Dynamic Model: QPM

The Bank of Canada's new Quarterly Projection Model, QPM, combines the short-term dynamic properties necessary to support regular economic projections with the consistent behavioural structure necessary for policy analysis.
Content Type(s): Staff research, Technical reports Topic(s): Economic models JEL Code(s): C, C5, C53, E, E1, E17

Provincial Credit Ratings in Canada: An Ordered Probit Analysis

Staff Working Paper 1996-6 Stella Cheung
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.
Content Type(s): Staff research, Staff working papers Topic(s): Financial markets JEL Code(s): H, H6, H63

A Distant-Early-Warning Model of Inflation Based on M1 Disequilibria

A vector error-correction model (VECM) that forecasts inflation between the current quarter and eight quarters ahead is found to provide significant leading information about inflation. The model focusses on the effects of deviations of M1 from its long-run demand but also includes, among other things, the influence of the exchange rate, a simple measure of the output gap and past prices.

Overnight Rate Innovations as a Measure of Monetary Policy Shocks in Vector Autoregressions

Staff Working Paper 1996-4 Walter Engert, Ben Fung, Jamie Armour
The authors examine the Bank of Canada's overnight rate as a measure of monetary policy in vector autoregression (VAR) models. Since the time series of the Bank's current measure of the overnight rate begins only in 1971, the authors splice it to day loan rate observations to obtain a sufficiently long period of data.

Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology

Staff Working Paper 1996-2 Pierre St-Amant
In this paper, the author uses structural vector autoregression methodology to decompose U.S. nominal interest rates into an expected inflation component and an ex ante real interest rate component. He identifies inflation expectations and ex ante real interest rate shocks by assuming that nominal interest rates and inflation expectations move one-for-one in the long-run—they are cointegrated (1,1)—and that the real interest rate is stationary.
Content Type(s): Staff research, Staff working papers Topic(s): Interest rates, International topics JEL Code(s): E, E3, E31, E4, E43

Switching Between Chartists and Fundamentalists: A Markov Regime-Switching Approach

Staff Working Paper 1996-1 Robert Vigfusson
Since the early 1980s, models based on economic fundamentals have been poor at explaining the movements in the exchange rate (Messe 1990). In response to this problem, Frankel and Froot (1988) developed a model that uses two approaches to forecast the exchange rate: the fundamentalist approach, which bases the forecast on economic fundamentals, and the chartist approach, which bases the forecast on the past behaviour of the exchange rate.
Content Type(s): Staff research, Staff working papers Topic(s): Financial markets JEL Code(s): C, C4, C40, G, G1, G12

The Electronic Purse: An Overview of Recent Developments and Policy Issues

Technical Report No. 74 Gerald Stuber
Futurists have been speculating about the prospects for a cashless society for many years, and such predictions became more frequent following the introduction of "smart" cards - cards containing a computer chip - in the mid-1970s.
December 10, 1995

Developments in trusteed pension funds

Trusteed pension funds are one of the most important sources of retirement income for Canadians. They have also been one of the fastest-growing sectors of the Canadian financial market. Trusteed pension funds play an important role in capital markets, channelling billions of dollars of their members' contributions into investments in financial and real assets. This article presents an overview of the trusteed pension funds sector. It provides a context for this overview by briefly presenting other sources of retirement income in Canada. It then examines the sources of the sector's rapid growth, including regulatory developments that have affected it, namely the increase in allowable foreign content and the adoption of the prudent person rule. Finally, it looks at the evolution of the sector's asset mix and how the sector interacts with capital markets.
December 9, 1995

Survey of the Canadian foreign exchange and derivatives markets

Since 1983, the Bank of Canada has conducted a triennial survey of foreign exchange market activity in Canada. The latest survey was done in April 1995 and covered activity in both the foreign exchange market and in the derivatives markets. The central banks of most other industrialized countries with active foreign exchange and derivatives markets also conducted similar surveys. This was the first time that markets for over-the-counter (OTC) derivatives were surveyed by central banks in a systematic and comprehensive fashion. The average daily turnover in the Canadian foreign exchange market, including foreign exchange derivatives, has continued to grow rapidly (by approximately 36 per cent to about U.S.$30 billion) since the last survey, although at a slower pace than during the 1980s. Foreign exchange and interest rate derivatives contracts dominate derivatives market activity, with equity and commodity derivatives activity being almost negligible in comparison. Through April 1995, daily turnover volume in Canadian foreign exchange and interest rate derivatives markets averaged about U.S.$19 billion and U.S.$15 billion, respectively, mostly in forward and swap transactions.