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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.

While central banks cannot provide complete foresight with respect to their future policy actions, it is in the interests of both central banks and market participants that central banks be transparent about their reaction functions and how they may evolve in response to economic developments, shocks, and risks to their outlooks.

This note analyzes the evolution of the narrative in the Bank of Canada’s Monetary Policy Report (MPR). It presents descriptive statistics on the core text, including length, most frequently used words and readability level—the three Ls. Although each Governor of the Bank of Canada focuses on the macroeconomic events of the day and the mandate of inflation targeting, we observe that the language used in the MPR varies somewhat from one Governor’s tenure to the next.

Schembri studies Canada's post-World War II experience in introducing a floating exchange rate, including its effects on the Canadian economy and its influence on the development of macroeconomic theory. In particular, Canada's flexible exchange rate and high degree of capital mobility with the United States provided an unprecedented experiment for macroeconomic policy. The successes and difficulties encountered by Canadian authorities in managing monetary and fiscal policy under this regime drew the interest of researchers at the International Monetary Fund and elsewhere and had a significant impact on the development of the Mundell-Fleming model, the path-breaking innovation in modern open-economy macroeconomics.

Discussion of recent research into three ways that oil-futures prices can improve our understanding of current conditions and future prospects in the global market for crude oil; inflation expectations and the conduct of monetary policy: a review of recent evidence and experience; examination of the influence of various forms of economic uncertainty on the performance of different classes of monetary policy rules; how, when, and why such revisions to many important economic variables occur.

While demographic change has been an ongoing process in Canada, labour market implications of an aging population will become more acute in coming years. This article discusses the anticipated slowing in the growth of trend labour input over the coming decades with the aging of the baby boomers, declining fertility rates, and the stabilization of the labour force attachment of women. As the pool of labour shrinks, employers and governments will be looking for ways to address barriers to continued labour force participation and firms will have a greater incentive to find ways of improving labour productivity.

This article examines the developments in the monetary aggregates over the course of 1997 and their implications for future economic activity. The narrow aggregate, M1, grew rapidly in the first half of 1997 but slowed somewhat during the second half of the year. Much of the strong growth in this aggregate over the last several years has been associated with a higher demand for transactions balances as interest rates declined and economic activity revived. There were some special factors at play, however, that are discussed in the article. The Bank expects some slowing in M1 growth through 1998 and into 1999. This would be consistent with a trend of inflation within the inflation-control target range of 1 to 3 per cent over the next couple of years. Growth in the broad aggregate, M2+, continued to be distorted by the shift of savings out of fixed-term deposits into mutual funds. A broader aggregate that includes M2+, CSBs, and all mutual funds and thus provides a better estimate of broad money growth, grew at a moderate pace during 1997. The recent behaviour of the broad monetary aggregates continues to suggest that inflation will remain low in coming years.

We present a dynamic debt strategy model framework designed to assist sovereign debt portfolio managers in choosing an optimal debt issuance strategy. The main innovation of this framework is the introduction of dynamic issuance strategies, which allow issuance decisions to vary over time based on the model’s simulated state variables.

In this issue of the Financial System Review, the Governing Council judges that the risks to the stability of Canada’s financial system remain high, as in December. The sources of the key risks are broadly the same as those highlighted at that time and emanate primarily from the external environment.

Errata: The colour labels for Chart 11 in the June 2012 issue and for Chart 12 in the December 2011 isssue were defined incorrectly. See revised charts.

This report reviews the use of quantitative tools to gauge market participants’ assessment of banking system resilience. These measures complement traditional balance-sheet metrics and suggest that markets consider large Canadian banks to be better placed to weather adverse shocks than banks in other advanced economies. Compared with regulatory capital ratios, however, the measures suggest less improvement in banking system resilience since the pre-crisis period.