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Over the past year, Canada’s economy has outperformed the economies of virtually all the other major industrial countries.

Two major issues dominate the analysis and policy discussion in this Monetary Policy Report: the nature and extent of the global economic slowdown that began late last year and the consequences of the terrorist attacks in the United States.

During the past six months, global economic uncertainties have intensified, largely as a result of developments in emerging-market economies.

This is the second in a series of semi-annual reports designed to increase the transparency and understanding of Canadian monetary policy.

Growth in the Canadian economy has been essentially in line with the expectations set out in the Bank’s January Monetary Policy Report Update.

Canada’s inflation-control targets establish a specific medium-term objective for monetary policy.

The Canadian economy continues to operate just above its full production capacity, and the near-term outlook for core inflation has moved slightly higher.

ToTEM III is the most recent generation of the Bank of Canada’s main dynamic stochastic general equilibrium model for projection and policy analysis. The model helps Bank staff tell clear and coherent stories about the Canadian economy’s current state and future evolution.

In our analysis of the US productivity slowdown in the 1970s and 2000s, we find that a significant portion of this deceleration can be attributed to a lack of improvement in allocative efficiency across sectors. Our analysis further identifies increased sector-level volatility as a major contributor to this lack of improvement in allocative efficiency.

Exporters frequently change their market destinations. This paper introduces a new approach to identifying the drivers of these decisions over time. Analysis of customs data from China and the UK shows most changes are driven by demand rather than supply-related shocks.