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Since the last Report, the Canadian economy has advanced broadly in line with expectations.

In the year just ended, the global economy faced a number of exceptional challenges, reflecting a wide range of economic, financial, and geopolitical risks and uncertainties. These included the fallout from the September 2001 terrorist attacks, corporate accounting scandals, stock market volatility, and developments in the Middle East. Despite this global backdrop, the Canadian economy outperformed virtually all other industrial economies, growing by about 3 1/4 per cent and creating 560,000 jobs, while inflation expectations remained well anchored to the Bank of Canada’s 2 per cent inflation-control target.

The five articles in this issue present research and analysis by Bank staff covering a variety of topics: the growth of Canadian-dollar-denominated assets in official foreign reserves; the emergence of platform-based digital currencies; methods of forecasting the real price of oil; measures of uncertainty in monetary policy; and the recent performance of the labour market in Canada and the United States.

Since the May Report, the international economic environment has continued to improve. Economic activity abroad grew faster than expected, while inflation in the major economies remained subdued.

The Canadian economy continues to adjust to major global developments.

The Canadian economy continued to expand robustly in 2000 while inflation remained low.

In the last half-year, the economic expansion in Canada has become well established, supported by low inflation, highly stimulative monetary conditions, and a strong U.S. economy.

The Canadian economy continues to adjust to developments in the global economy.

The Canadian economy regained strong momentum in 1999 as the U.S. economy remained vigorous, the global economy recovered, and commodity prices moved upwards.

We develop a model with firm heterogeneity in importing and cross-border shopping among consumers. Exchange-rate appreciations lower the cost of imported goods, but also lead to more cross-border shopping; hence, the net impact on aggregate retail prices and sales is ambiguous.