Search

We study the impact government expenditure has on inflation. We find that changes in government expenditure account for a substantial portion of inflation variations. We also find that inflation and inflation expectations respond negatively to fiscal spending shocks, reaffirming the supply-side channel through which inflation responds to fiscal expansions.

Historically, rapid and unsustainable increases in the demand for goods and services originating within the economies of Canada's major trading partners have had a significant impact on the domestic economy. These episodes are typically characterized by increases in world commodity prices and by a tightening of monetary conditions abroad to contain inflationary pressures. In this article, the author uses the Bank's quarterly projection model (QPM) (described in the autumn 1994 issue of the Review) to trace the mechanisms that transmit these foreign developments throughout the Canadian economy. In addition, he outlines the response that is required from domestic monetary authorities to maintain a target rate of inflation.

Uncertainty about the level of future inflation adversely affects the economy because it distorts the savings and investment decisions of households and businesses. Since these decisions typically involve planning horizons of many years, the adverse effects from inflation uncertainty can be reduced by adopting a policy framework that makes future inflation more predictable over long time horizons. When the inflation-control target was renewed in May 2001, the agreement affirmed that monetary policy will be directed at moving inflation to the 2 per cent midpoint of the target range over a six-to-eight-quarter horizon. The author describes how this policy commitment increases the predictability of average inflation over periods longer than one year. This relationship is illustrated using the Canadian experience from the inflation-targeting period.

This monthly newsletter features the latest research publications by Bank of Canada economists including external publications and working papers published on the Bank of Canada’s website.

This paper discusses three long-term forces that are acting on the global economy and their implications for companies and policy-makers.

In 2005, the Bank of Canada celebrated its 70th anniversary. Since the Bank opened its doors in March 1935, it has evolved into a national institution at the heart of Canada’s economy. We had a lot to celebrate in 2005—particularly our progress over the past 70 yearsand our continuing contribution to the economic and financial well-being of Canadians.

Transparency is the cornerstone of a well-functioning financial system. It's an issue that has been getting a lot of attention, and deservedly so, as we consider what has gone wrong in the market for asset-backed commercial paper.

The Government of Canada and the Bank of Canada agreed that the inflation target will continue to be defined in terms of the 12-month rate of change in the total CPI, that it will continue to be the 2 per cent mid-point of the 1 to 3 per cent inflation-control range, and that the agreement will run for another five-year period, ending 31 December 2021.

In this article, the authors explain the methodology used to construct real exchange rate (RER) indexes. They also compare and assess various Canadian RER indexes from both an empirical and conceptual standpoint. The authors conclude that both theory and empirical evidence suggest that the best RER indexes are those based on unit labour costs. They note, however, that, for practical reasons, policy-makers should also consider RER indexes based on prices when formulating monetary policy.