Search

Governor Stephen S. Poloz discusses how growth in Canada’s service sector is leading to high-paying jobs and helping complete the economic recovery.

The European Union, which currently consists of 15 states, occupies an important place among the advanced economies. The final stage of the European economic and monetary union (EMU) is scheduled to begin in January 1999 with the adoption of a common currency called the "euro." A decision on which countries will participate in the euro area in 1999 will be made next spring based in part on the achievement of the economic criteria laid out in the Maastricht Treaty. In this article, the authors, after a brief discussion of the historical background, cast some light on the institutional aspects of the EMU, on the formulation and implementation of economic policy, as well as on the internal and external effects of EMU completion. For Canada, the direct implications of the shift to the euro appear to be relatively modest, at least in the short run.

This paper analyzes the optimal quantity of central bank reserves in an economy where reserves and other financial assets provide liquidity benefits. Using a static model, I derive a constrained Friedman rule that characterizes the socially optimal level of reserves, demonstrating that this quantity is neither necessarily large nor small but depends on the marginal benefits of reserves relative to alternative safe assets.

Central banks continuously strive to improve how they communicate to financial markets and the public in order to increase transparency. For this reason, many central banks have begun to include guidance on the policy rate in the form of forward-looking statements in their communications. This article examines the debate over the usefulness of providing such statements from both theoretical and empirical standpoints. The evidence presented here suggests that the use of forward-looking statements in Bank of Canada communications has made the Bank more predictable, but not necessarily more transparent.

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.

The Canadian corporate bond market has experienced a renaissance, in recent years, against a background of low inflation, reduced public borrowing, and the lowest levels of long-term interest rates in a generation. The authors examine the influences shaping the market and also compare the Canadian market with those of other countries. The increased level of activity in the market has been accompanied by the development of new products and by greater investor interest in instruments with higher returns and higher credit risk. A more dynamic Canadian corporate bond market is a welcome development since it offers borrowers an alternative source of funds, especially companies that have typically relied on the banking system and on the U.S. corporate bond market for financings involving higher levels of credit risk.

We propose an open-economy New Keynesian model with financial integration that allows financial intermediaries to hold foreign long-term bonds. We study the implications of financial integration on monetary policy transmission. Among various aspects of financial integration, the bond duration plays a major role. These results hold for conventional and unconventional monetary policies.

Read a message from Governor Macklem and learn more about our planning framework and how we will put our strategic plan into action.

The theory that rich economic diversity of businesses and households both affects and is shaped by economy-wide fluctuations has strong implications for monetary policy. This review places these insights in a Canadian context.

Although the standard of living of Canadians has improved as a result of terms-of-trade gains created by the sharp rise in real commodity prices over the past five years or so, the commodity-price increase, combined with an exchange rate appreciation and real income gain, triggered structural adjustments by altering underlying economic incentives. The frictions generated in adjusting to the relative price shock have likely contributed to hold back aggregate productivity growth. Dupuis and Marcil examine the structural adjustments that have been required-in particular, the resource reallocation among the different sectors of the economy-and its effects on employment, output, and productivity, as well as the responses of final domestic demand and external trade flows.