The Effect of Oil Price Shocks on Asset Markets: Evidence from Oil Inventory News
We quantify the reaction of U.S. equity, bond futures, and exchange rate returns to oil price shocks driven by oil inventory news.
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
A Portfolio-Balance Model of Inflation and Yield Curve Determination
Staff working paper 2020-6
Antonio Diez de los Rios
How does the supply of nominal government debt affect the macroeconomy? To answer this question, we propose a portfolio-balance model of the yield curve in which inflation is determined through an interest rate rule.
Content Type(s):
Staff research,
Staff working papers
JEL Code(s):
E,
E4,
E43,
E5,
E52,
G,
G1,
G12,
H,
H6,
H63
Research Theme(s):
Models and tools,
Economic models,
Monetary policy,
Inflation dynamics and pressures,
Monetary policy framework and transmission,
Monetary policy tools and implementation
IMPACT: The Bank of Canada’s International Model for Projecting Activity
Technical report No. 116
Patrick Blagrave,
Claudia Godbout,
Justin-Damien Guénette,
René Lalonde,
Nikita Perevalov
We present the structure and features of the International Model for Projecting Activity (IMPACT), a global semi-structural model used to conduct projections and policy analysis at the Bank of Canada. Major blocks of the model are developed based on the rational error correction framework of Kozicki and Tinsley (1999), which allows the model to strike a balance between theoretical structure and empirical performance.
Content Type(s):
Staff research,
Technical reports
JEL Code(s):
C,
C6,
C68,
E,
E2,
E27,
E3,
E37,
F,
F0,
F01,
F3,
F32,
F4,
F47
Research Theme(s):
Models and tools,
Economic models,
Monetary policy,
Real economy and forecasting,
Structural challenges,
International trade, finance and competitiveness
CBDC and Monetary Sovereignty
Staff analytical note 2020-5
Antonio Diez de los Rios,
Yu Zhu
In an increasingly digitalized world, issuers of private digital currency can weaken central banks’ ability to stabilize the economy. By continuing to make central bank money attractive as a payment instrument in a digital world, a central bank digital currency (CDBC) could help to maintain a country’s monetary sovereignty.
Content Type(s):
Staff research,
Staff analytical notes
JEL Code(s):
E,
E5,
E52,
E58,
F,
F5,
F55,
G,
G1,
G15
Research Theme(s):
Financial system,
Financial stability and systemic risk,
Monetary policy,
Monetary policy tools and implementation,
Money and payments,
Digital assets and fintech,
Payment and financial market infrastructures
CBDC and Monetary Policy
Staff analytical note 2020-4
Mohammad Davoodalhosseini,
Francisco Rivadeneyra,
Yu Zhu
Improving the conduct of monetary policy is unlikely to be the main motivation for central banks to issue a central bank digital currency (CBDC). While some argue that a CBDC could allow more complex transfer schemes or the ability to break below the zero lower bound, we find these benefits might be small or difficult to realize in practice.
Content Type(s):
Staff research,
Staff analytical notes
JEL Code(s):
E,
E4,
E41,
E5,
E51,
E52
Research Theme(s):
Monetary policy,
Monetary policy framework and transmission,
Monetary policy tools and implementation,
Money and payments,
Digital assets and fintech
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.