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The Bank’s outlook for inflation and overall economic activity in Canada to the end of 2002 has not changed fundamentally from that presented in the May Monetary Policy Report.

Senior Deputy Governor Carolyn Rogers discusses the big economic forces reshaping the economy, the Bank’s monetary policy framework renewal and affordability.

Since the April Monetary Policy Report, three developments have led the Bank of Canada to make small modifications to its outlook for economic growth and inflation in Canada.

Coletti and Lalonde compare inflation targeting and price-level targeting in the context of a small open economy subject to sizable terms-of-trade shocks. The authors summarize recent research that compares the ability of price-level targeting and inflation targeting to stabilize the macroeconomy when confronted with shocks similar to those experienced by Canada in recent years. Their preliminary results suggest that price-level targeting may represent a feasible alternative to traditional inflation targeting. Their article also provides insight into the direction of current research in this area at the Bank.

This article focuses on the role that loans backed by housing collateral play in amplifying housing booms and, more generally, procyclicality in the housing market. The author uses a model developed to include borrower and lender households, as well as a housing market, to examine the impact that altering the loan-to-value ratio (either permanently or countercyclically) might have on the volatility of house prices and mortgage debt.

The autumn Business Outlook Survey shows that firms’ expectations continue to diverge as they gradually adjust to an environment of weaker commodity prices and a lower Canadian dollar. The overall sales and investment outlook improved, owing in part to continued support from U.S. demand. However, business sentiment remains weak for firms directly and indirectly tied to the resource sector.

Businesses remain positive about the economic outlook, although some forward-looking indicators have eased from the levels recorded in recent surveys, and the strength in commodity prices has raised expectations for costs and inflation.

Erratum: Please note that the legend for Chart 9 (French version only) should read as follows: au-dessus de 3 % , rather than au-dessous de 3 %

The results of the autumn survey suggest that, in an environment of slow global economic growth and uncertainty about demand, firms have tem¬pered their expectations for business activity.

Responses to the summer survey provide further indications that uncertainty regarding the nature and timing of a notable improvement in growth prospects is bearing on firms’ expectations and investment decisions.

The results of the winter survey provide some evidence that confidence in the recovery is growing. While the balance of opinion on future sales is little changed, and respondents still expect the recovery to be gradual, more firms are planning to increase investment spending and employment than in the previous two surveys.