The contribution of firm profits to the recent rise in inflation Staff Analytical Note 2023-12 Panagiotis Bouras, Christian Bustamante, Xing Guo, Jacob Short We measure the contribution to inflation from the growth in markups of Canadian firms. The dynamics of inflation and markups suggest that changes in markups could account for less than one-tenth of inflation in 2021. Further, they suggest that peak inflation was driven primarily by changes in the costs of firms. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Firm dynamics, Inflation and prices, Market structure and pricing JEL Code(s): D, D2, D22, D4, E, E3, E31, L, L1, L11
Do hedge funds support liquidity in the Government of Canada bond market? Staff Analytical Note 2023-11 Jabir Sandhu, Rishi Vala While Government of Canada bond transactions of hedge funds are typically in the opposite direction to those of other market participants, during the peak period of market turmoil in March 2020, hedge funds sold these bonds, just as other market participants did. This shows that hedge funds can at times contribute to one-sided markets and amplify declines in market liquidity. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Coronavirus disease (COVID-19), Financial markets, Financial stability, Market structure and pricing JEL Code(s): D, D4, D47, D5, D53, G, G1, G12, G14, G2, G23
BoC–BoE Sovereign Default Database: What’s new in 2023? Staff Analytical Note 2023-10 David Beers, Obiageri Ndukwe, Karim McDaniels, Alex Charron The BoC–BoE database of sovereign debt defaults, published and updated annually by the Bank of Canada and the Bank of England, provides comprehensive estimates of stocks of government obligations in default. The 2023 edition includes a new section about the characteristics of sovereign defaults and provides new visuals showing regional debt in default. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Debt management, Development economics, Financial stability, International financial markets JEL Code(s): F, F3, F34, G, G1, G10, G14, G15
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 Research Topic(s): Asset pricing, Financial markets, Monetary policy transmission JEL Code(s): E, E4, E44, E47, E5, E52
Markups and inflation during the COVID-19 pandemic Staff Analytical Note 2023-8 Olga Bilyk, Timothy Grieder, Mikael Khan We find that prices and costs for consumer-oriented firms moved roughly one-for-one during the COVID-19 pandemic. This means firms fully passed rising costs through to the prices they charged. However, our results are suggestive, given data limitations and the uncertainty associated with estimating markups. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Firm dynamics, Inflation and prices JEL Code(s): D, D2, D4, E, E2, E3, L, L1
Benchmarks for assessing labour market health: 2023 update Staff Analytical Note 2023-7 Erik Ens, Kurt See, Corinne Luu We enhance benchmarks for assessing strength in the Canadian labour market. We find the labour market remains tight despite recent strong increases in labour supply, including among prime-working-age women. We also assess the anticipated easing in labour conditions in a context of high population growth. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Business fluctuations and cycles, Coronavirus disease (COVID-19), Econometric and statistical methods, Labour markets, Monetary policy JEL Code(s): E, E2, E24, J, J2, J21, J6
Potential output and the neutral rate in Canada: 2023 assessment Staff Analytical Note 2023-6 Julien Champagne, Christopher Hajzler, Dmitry Matveev, Harlee Melinchuk, Antoine Poulin-Moore, Galip Kemal Ozhan, Youngmin Park, Temel Taskin We expect that potential output growth will rebound from 1.4% in 2022 to 2.2% on average between 2023 and 2026. We revised down our estimates of growth over 2022–25 relative to the April 2022 assessment. The Canadian nominal neutral rate remains unchanged—in the range of 2% to 3%. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Economic models, Interest rates, Labour markets, Monetary policy, Potential output, Productivity JEL Code(s): E, E2, E3, E4, E5
Assessing global potential output growth and the US neutral rate: April 2023 Staff Analytical Note 2023-5 Salma Ahmed, Aviel Avshalumov, Tania Chaar, Eshini Ekanayake, Helen Lao, Louis Poirier, Jenna Rolland-Mills, Argyn Toktamyssov, Lin Xiang We expect global potential output growth to increase from 2.5% in 2022 to 2.8% by 2026. Compared with the April 2022 staff assessment, global potential output growth is marginally slower. The current range for the US neutral rate is 2% to 3%, unchanged from the last annual assessment. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Interest rates, Monetary policy, Potential output, Productivity JEL Code(s): E, E1, E2, E4, E5, F, F0, O, O4
What we can learn by linking firms’ reported emissions with their financial data Staff Analytical Note 2023-4 Matthew Ackman, Timothy Grieder, Callie Symmers, Geneviève Vallée We analyze the financial statements and stock prices of publicly traded firms incorporated in Canada that report greenhouse gas emissions. We find that these firms primarily use equity financing. We also find that equity investors increasingly account for firms’ emissions when making investment decisions but the impact appears small. This suggests that assets exposed to climate change remain at risk of a sudden repricing. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Asset pricing, Climate change, Financial stability, Firm dynamics JEL Code(s): G, G1, G3, Q, Q5
Firms’ inflation expectations and price-setting behaviour in Canada: Evidence from a business survey Staff Analytical Note 2023-3 Ramisha Asghar, James Fudurich, Jane Voll Canadian firms’ expectations for high inflation may be influencing their price setting, supporting strong price growth and delays in the transmission of monetary policy. Using data from the Business Outlook Survey, we investigate the reasons behind widespread price growth seen in Canada in 2021 and early 2022. Content Type(s): Staff research, Staff analytical notes Research Topic(s): Firm dynamics, Inflation and prices, Monetary policy transmission, Recent economic and financial developments JEL Code(s): D, D2, D22, E, E3, E31