Is Money Essential? An Experimental Approach
Monetary theory says that money is essential if it helps to achieve better incentive-feasible outcomes. We test this in the laboratory.
Monetary policy
Our commitment is to keep inflation low, stable and predictable. To do this, we must understand what causes inflation and ensure our tools and framework remain fit for purpose in a world with more frequent supply disruptions.
In recent years, Canada has faced high inflation and used exceptional monetary policy tools, such as quantitative easing, to restore price stability. Looking back on this period offers a valuable opportunity to understand the underlying drivers of inflation and evaluate the effectiveness of these monetary policy tools.
The future of the economic environment remains uncertain, and structural challenges are making both the global and Canadian economies more susceptible to supply disruptions. That makes it important to gain a comprehensive understanding of how these challenges affect production, employment, inflation dynamics and the transmission of monetary policy.
Studying these issues will help monetary policy adapt to changes in the economy and maintain price stability. We are looking at issues in several areas, including:
- the pricing strategies that firms use, including during supply shocks
- the best approaches for setting monetary policy in periods of high uncertainty
- the impact of monetary policy on the supply and demand of housing
- the effectiveness of various monetary policy tools used during the COVID-19 pandemic
- the ability of flexible inflation-targeting to maintain price stability when the economy is unpredictable
Inflation dynamics
Our research on inflation dynamics aims to further our understanding of the factors behind inflation, particularly since the end of the COVID-19 pandemic. To do so, we are using new data sources, innovative research methods and advanced economic models. For example, we are using novel business- and product-level data to explore how businesses pass on costs to consumers. Similarly, consumer-level data help us understand how households adjust their spending and expectations as inflation rises and falls.
Transmission and conduct of monetary policy
Canada is entering a period of rapid economic transformation. In this context, we need to understand how monetary policy affects different households and businesses and how it works its way through the economy. We must also find the best way to set monetary policy and manage risks—responding to trade-offs between stabilizing growth and controlling inflation—particularly if Canada faces more frequent supply shocks.
Monetary policy tools and implementation
The economic effects of the COVID-19 pandemic prompted the Bank to use extraordinary tools, such as quantitative easing. The use of these tools has had a significant impact on the size and structure of the Bank’s balance sheet. Our research focuses on the impact and effectiveness of these tools and on how the Bank can effectively influence market interest rates with an expanded balance sheet.
Monetary policy framework
Jointly with the Government of Canada, the Bank reviews its monetary policy framework every five years to keep pace with changes in the economic environment. Since the COVID-19 pandemic, more frequent shocks and unprecedented challenges have increased volatility, generated persistent imbalances in the housing market and reduced the reliability of our key measures of underlying inflation. Our research will help future reviews of our framework to ensure that monetary policy remains effective in promoting the economic and financial well-being of Canadians.
Related research
It takes a panel to predict the future: What the stock market says about future economic growth in Canada
Staff analytical note 2023-9
Greg Adams,
Jean-Sébastien Fontaine
Valuation ratios in the Canadian stock market can help reveal investors’ expectations about future economic growth because the impact of economic growth on valuation ratios can vary across industries. We find that this variation helps produce accurate forecasts of future growth of real gross domestic product in Canada. The forecasts from our model declined by just over 3 percentage points between January 2022 and February 2023—a period when the Bank of Canada rapidly increased the overnight rate. As well, we find that interest-rate-sensitive industries had an outsized contribution to this expected slowdown in growth.
Content Type(s):
Staff research,
Staff analytical notes
JEL Code(s):
E,
E4,
E44,
E47,
E5,
E52
Research Theme(s):
Financial markets and funds management,
Market functioning,
Monetary policy,
Monetary policy framework and transmission,
Real economy and forecasting
Global Demand and Supply Sentiment: Evidence from Earnings Calls
Staff working paper 2023-37
Temel Taskin,
Franz Ulrich Ruch
This paper quantifies global demand, supply and uncertainty shocks and compares two major global recessions: the 2008–09 Great Recession and the COVID-19 pandemic. We use two alternate approaches to decompose economic shocks: text mining techniques on earnings calls transcripts and a structural Bayesian vector autoregression model.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
C,
C1,
C11,
C3,
C32,
E,
E3,
E32,
G,
G1,
G10
Research Theme(s):
Models and tools,
Econometric, statistical and computational methods,
Monetary policy,
Inflation dynamics and pressures,
Real economy and forecasting
What Can Earnings Calls Tell Us About the Output Gap and Inflation in Canada?
Staff discussion paper 2023-13
Marc-André Gosselin,
Temel Taskin
We construct new indicators of demand and supply for the Canadian economy by using natural language processing techniques to analyze earnings calls of publicly listed firms. Our results indicate that the new indicators could help central banks identify inflationary pressures in real time.
Content Type(s):
Staff research,
Staff discussion papers
JEL Code(s):
C,
C1,
C3,
E,
E3,
E5
Research Theme(s):
Models and tools,
Econometric, statistical and computational methods,
Monetary policy,
Inflation dynamics and pressures,
Real economy and forecasting
Why Consumers Disagree About Future Inflation
Staff discussion paper 2023-11
Naveen Rai,
Patrick Sabourin
Since 2022, consumer inflation expectations have shifted, with a significant increase in those expecting high inflation in the coming year and a surge in those expecting deflation further in the future. Using data from the Canadian Survey of Consumer Expectations, this paper seeks to assess the factors that influence people to expect high inflation, moderate inflation or deflation.
Content Type(s):
Staff research,
Staff discussion papers
JEL Code(s):
C,
C8,
C83,
D,
D8,
D84,
E,
E3,
E31
Research Theme(s):
Monetary policy,
Inflation dynamics and pressures,
Real economy and forecasting
Disclaimer
Bank of Canada staff produce research and analysis to support the work of the Bank and to advance knowledge in the fields of economics and finance. The research is non-partisan and evidence based. All research is produced independently from the Bank’s Governing Council. The views expressed in each paper or article are solely those of the authors and may differ from official Bank of Canada views.