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Social learning models of investment provide an interesting explanation for sudden changes in investment behaviour.

Capital markets and their related financial instruments make an important contribution to the welfare of Canadians. The Bank of Canada is interested in the efficient functioning of capital markets through each of its responsibilities for monetary policy, the financial system, and funds management. Hendry and King highlight the key findings of Bank research published over the past year that addresses capital market efficiency and summarize lessons that have been learned. The research conducted thus far suggests that Canadian capital markets are efficient for a capital market of Canada's size but are less diverse than the U.S. capital markets, indicating that there is room for improvement in certain areas.

Using turnover ratios, Anderson and Lavoie describe the recent evolution of liquidity in various secondary government bond markets, focusing specifically on the market for Government of Canada securities. They attribute much of the recent variation in liquidity to such cyclical factors as changes in the interest rate environment and investors' appetite for risk, as well as developments in equity markets in the late 1990s. They also examine longer-term structural and policy-related trends, including the rate of adoption of financial and technological innovations and the level of government borrowing and debt-management initiatives.

In a recent speech, Deputy Governor Sheryl Kennedy discusses how the efficiency of Canada's capital markets compares in a global context. Taking into account the three inter-related aspects of an efficient market (allocational, operational, and informational efficiency), Kennedy reviews the recent performance of Canadian capital markets under such headings as size, completeness, and access to capital and the instruments needed to hedge, or distribute, risk (allocational efficiency). To assess operational efficiency, she considers Canadian markets' liquidity and whether their transactional costs are competitive. Finally, she reviews transparency and market integrity (and how integrity is maintained) to determine markets' informational efficiency. She also offers several suggestions as to how Canadian markets can continue to be improve and maintain their competitiveness.

Counterfeiting poses a significant public policy issue because of the important role that paper money plays in Canada's payments system. Yet the threat of counterfeiting in all economies has increased markedly in the past decade as a result of technological advances to photocopiers and computer printers. An appropriate public policy response is thus necessary to maintain the public's continued confidence in the national currency. To assess the threat from counterfeiting, including possible loss of confidence in the currency, estimating the stock of counterfeits circulating is necessary. In this article, Chant proposes a composite method of detecting counterfeits as an effective alternative to existing methods and offers estimates of the extent of counterfeiting Canadian currency for 2001. An Addendum to the article summarizes Chant's methods and updates the calculations to 2003.

Inflation forecasting is fundamental to monetary policy. In practice, however, economists are faced with competing goals: accuracy and theoretical consistency.

The authors conduct a counterfactual simulation of the proposed rules under the new Basel Capital Accord (Basel II), including the revised treatment of expected and unexpected credit losses proposed by the Basel Committee in October 2003.

The authors study a general-equilibrium economy in which agents have the ability to invest in a risky technology.

Choosing a well-designed framework for fiscal and monetary policies is a challenge for economic authorities.

The author uses panel data to assess the sensitivity of investment to cash flow in non-financial firms, taking into account the role their financial health plays in investment decisions.