Structural challenges

The world is constantly changing. Factors like trade conflicts, technological advances and climate change can challenge the very foundations of the economy. We study these developments to keep our economy strong and resilient.

In an increasingly interconnected and dynamic global economy, Canada faces various structural challenges that require careful analysis. These challenges are influenced not only by external factors such as geopolitics, global trade dynamics and technological advancements but also by internal factors, including demographic shifts and environmental sustainability. Understanding and addressing these structural challenges is crucial for keeping inflation low and stable, fostering growth and ensuring the economic well-being of Canadians.

Among the issues we are studying:

  • the structural factors behind Canada’s slow growth in productivity
  • how immigration and population aging impact inflation through wages, productivity and housing demand
  • how artificial intelligence will transform the demand for skills and affect productivity
  • how tariffs impact the economy and inflation in Canada
  • the impact to Canada if the US dollar ceases to be the global currency used for trade and finance

Productivity

Productivity growth is a main factor behind economic prosperity. Yet, Canada has seen slow growth in productivity for a long time. Understanding both the underlying factors behind productivity and its likely evolution are important for identifying inflationary pressures.

The four Ds: deglobalization, demographic shifts, digitalization and decarbonization

The four Ds are reshaping the Canadian economy. They may lead to more persistent pressures on inflation and cause inflation to be more volatile. For these reasons and more, examining these four structural trends is important.

  • Deglobalization is led by shifts in trade alliances and the rearranging of supply chains. It affects how Canada interacts with the global economy.
  • Demographic shifts, including population aging and immigration, influence the labour market and the demand for housing.
  • Digitalization affects productivity and the demand for skills, particularly as businesses use artificial intelligence tools more widely.
  • Decarbonization is essential to become environmentally sustainable but creates opportunities and challenges for economic growth.

The international monetary and financial system

The international monetary and financial system is the set of rules, institutions and mechanisms that govern exchange rates, cross-border flows of capital and the use of international currencies to facilitate the exchange of goods and services between countries. This system is facing heightened uncertainty and potential structural change. Geopolitical tensions, shifts in trade policies and the evolving role of the US dollar as the dominant reserve currency are key factors influencing the system. Understanding the implications of these changes for Canada is critical.

Related research

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Understanding the Time Variation in Exchange Rate Pass-Through to Import Prices

Staff discussion paper 2017-12 Rose Cunningham, Min Jae Kim, Christian Friedrich, Kristina Hess
In this paper, we analyze the presence of time variation in the pass-through from the nominal effective exchange rate to import prices for 24 advanced economies over the period 1995–2015. In line with earlier studies in the literature, we find substantial heterogeneity in the level of exchange rate pass-through across countries.
Content Type(s): Staff research, Staff discussion papers JEL Code(s): E, E3, E31, F, F3, F31, F4, F41 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Structural challenges, International trade, finance and competitiveness

Digitalization and Inflation: A Review of the Literature

Staff analytical note 2017-20 Karyne B. Charbonneau, Alexa Evans, Subrata Sarker, Lena Suchanek
In the past few years, many have postulated that the possible disinflationary effects of digitalization could explain the subdued inflation in advanced economies. In this note, we review the evidence found in the literature. We look at three main channels.
Content Type(s): Staff research, Staff analytical notes JEL Code(s): D, D2, D22, E, E3, E31, L, L8, L81, O, O3, O33 Research Theme(s): Financial markets and funds management, Market structure, Monetary policy, Inflation dynamics and pressures, Structural challenges, Digitalization and productivity

Digital Transformation in the Service Sector: Insights from Consultations with Firms in Wholesale, Retail and Logistics

Staff analytical note 2017-19 Wei Dong, James Fudurich, Lena Suchanek
Firms increasingly rely on digital technologies such as e-commerce, cloud computing, big data, digital tracking and digital platforms that are reshaping business operations, business models and market structures. In this context, the Bank of Canada consulted with firms in wholesale, retail and logistics, as well as with related industry associations to yield insights on the adoption of digital technologies.
Content Type(s): Staff research, Staff analytical notes JEL Code(s): D, D2, D22, E, E3, E31, L, L8, L81, L9, L92, O, O3, O33 Research Theme(s): Financial markets and funds management, Market structure, Monetary policy, Inflation dynamics and pressures, Structural challenges, Digitalization and productivity

Identification of Random Resource Shares in Collective Households Without Preference Similarity Restrictions

Staff working paper 2017-45 Geoffrey R. Dunbar, Arthur Lewbel, Krishna Pendakur
Resource shares, defined as the fraction of total household spending going to each person in a household, are important for assessing individual material well-being, inequality and poverty. They are difficult to identify because consumption is measured typically at the household level, and many goods are jointly consumed, so that individual-level consumption in multi-person households is not directly observed.
Content Type(s): Staff research, Staff working papers JEL Code(s): C, C3, C31, D, D1, D11, D12, D13, I, I3, I32 Research Theme(s): Models and tools, Econometric, statistical and computational methods, Structural challenges, Demographics and labour supply

Alternative Scenario to the October 2017 MPR Base-Case Projection: Higher Potential Growth

Staff analytical note 2017-18 Jing Yang, Ben Tomlin, Olivier Gervais
We construct an alternative scenario in which trend labour input and business investment are stronger than that expected in the Bank of Canada’s base-case projection in the October 2017 Monetary Policy Report.
Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E2, E22, E24, E27, E5 Research Theme(s): Models and tools, Economic models, Monetary policy, Real economy and forecasting, Structural challenges, Demographics and labour supply
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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.

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