Democratic Political Economy of Financial Regulation
We offer a theory of how inefficiently lax financial regulation could arise in a democratic society.
Financial system
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Discount Rates, Debt Maturity, and the Fiscal Theory
Do bond risk premiums influence the effects of debt maturity operations? Using a model with realistic bond risk premiums, we show that maturity operations have sizable effects on expected inflation and output when the central bank passively responds to inflation and the fiscal authority weakly responds to the debt level. -
Updated Methodology for Assigning Credit Ratings to Sovereigns
We update the Bank of Canada’s credit rating methodology for sovereigns, including our approach to assessing their fiscal position and monetary policy flexibility. We also explicitly consider climate-related factors. -
Are Bank Bailouts Welfare Improving?
Financial sector bailouts, while potentially beneficial during a crisis, might lead to excessive risk taking if anticipated. Taking expectations and aggregate risk implications into account, we show that bailouts can be welfare improving, but only if capital adequacy constraints are sufficiently tight. -
Systemic Risk and Portfolio Diversification: Evidence from the Futures Market
This paper explores how the Canadian futures market contributed to banks’ systemic risk during the 2008 financial crisis. It finds that core banks as a whole traded against the periphery, in this way increasing their risk of simultaneous losses. -
More Money for Some: The Redistributive Effects of Open Market Operations
I use a search-theoretic model of money to study how open market operations affect the conduct of monetary policy and what this means for households along the wealth distribution. In the model, households vary in the size and composition of their portfolios, which in turn implies that they may be unevenly affected by open market operations. -
A Q-Theory of Banks
Using stock market data on banks, we show that the book value of loans recognizes losses with a delay. This delayed accounting is important for regulation because the requirements regulators impose are based on book values. -
Can the characteristics of new mortgages predict borrowers’ financial stress? Insights from the 2014 oil price decline
We study the relationship between characteristics of new mortgages and borrowers’ financial stress in Canada’s energy-intensive regions following the 2014 collapse in oil prices. We find that borrowers with limited home equity were more likely to have difficulty repaying debt. -
Canadian housing supply elasticities
We explain how housing supply elasticities for Canadian cities are estimated. The procedure we use exploits the systematic differences in various cities’ sensitivity to regional house-price cycles. -
Reaching for yield or resiliency? Explaining the shift in Canadian pension plan portfolios
“Reach for yield”—This is the commonly heard explanation for why pension plans shift their portfolios toward alternative assets. But we show that the new portfolios also hold more bonds, offer lower average returns and produce smaller and less volatile solvency deficits. These shifts are part of a broader strategy to reduce solvency risk.