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Clearing and settlement systems are essential to the smooth functioning of a modern market-based economy such as Canada's. During the past decade, there have been significant efforts in Canada and abroad to improve electronic clearing and settlement systems that handle payments obligations, either uniquely or in conjunction with transactions related to the purchase and sale of a broad range of financial instruments such as debt, equity, foreign exchange, or derivatives. This article examines some of the risks faced by participants and end-users of these systems and reviews the Bank of Canada's role in relation to these systems. For a number of years, the Bank has been involved informally with major clearing and settlement systems with a view to ensuring that systemic risk is adequately controlled. In July 1996, the Payment Clearing and Settlement Act was proclaimed. This Act formalized the role of the Bank in the oversight of clearing and settlement systems for the purpose of controlling systemic risk. The article provides an overview of the Bank's responsibilities. It also describes certain new powers that the Act made available to the Bank that could be exercised in its dealings with clearing and settlement systems.

In the first, mostly theoretical, part of this article, the author analyses the factors that affect the pass-through of exchange rate movements to consumer prices. In the second part, she studies the recent Canadian experience in this area, starting from 1992. The analysis in the first part of the article is used to investigate why the depreciation of the Canadian dollar by almost 20 per cent between 1992 and 1994 did not produce as much of an increase in the inflation rate as predicted by conventional estimates of the exchange rate pass-through. The author first explains this phenomenon using the factors described in the theoretical part of the article: demand conditions, the costs of adjusting prices, and expectations about the depreciation's duration. She then examines the role of more specific factors, such as the abolition of customs duties on trade between Canada and the United States and the restructuring of the retail market. It is clear that the latter two factors helped neutralize the effect of the depreciation on prices.

Gordon Thiessen, Governor of the Bank of Canada, delivered the HERMES-Glendon Lecture at York University, Toronto, in March 1995. The speech focussed on the interrelationships of uncertainty and the transmission of monetary policy to the economy. It looked at how the various types of uncertainty influence the behaviour of economic actors, and at how uncertainty affects the transmission of monetary policy through the economy. The first part of the lecture outlines the Bank of Canada's view of the transmission mechanism, with considerable attention paid to the role of uncertainty. In the second part, the various ways in which the Bank has tried to reduce uncertainty are discussed. The various kinds of uncertainty that impinge on the economy and on the policy process are addressed.

The Financial System Review is one vehicle that the Bank of Canada uses to contribute to the strength of the Canadian financial system. The Developments and Trends section of the Review aims to provide analysis and discussion of current developments and trends in the Canadian financial sector.

This paper studies exchange rate dynamics by incorporating bounded rationality, that is, limited foresight, in a small open-economy model. This behavior of limited foresight helps explain several observations and puzzles in the data of exchange rate movements.

Deputy Governor Timothy Lane explains how the Bank of Canada is preparing for a future where Canadians may need a digital currency issued by their central bank.

Businesses remain positive about the outlook for the next 12 months, despite more modest expectations for U.S. economic growth. Indicators of future sales and investment are moderately higher, and intentions to hire have become more widespread.

This background note explains the Bank’s official position on CBDC. It outlines the public policy, design, technology and risk management issues the Bank is considering as it builds its capacity to issue a CBDC in case it is needed in the future.

For more than 70 years now, the Couchiching Institute on Public Affairs has been bringing Canadians together with the purpose of asking some thought-provoking questions and encouraging lively, stimulating debates and action on a variety of key public policy issues.

This issue features a summary of the Bank’s annual conference, which this year dealt with financial globalization, and three articles that present research by Bank staff on Canada’s mortgage market, the role of adverse selection in financial crises, and payment networks.