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In this issue, Bank staff discuss recent developments in experimental macroeconomics, research results on price-level and unemployment thresholds in forward guidance, and the spillover effects of quantitative easing in advance economies. Articles also explore the competitiveness strategies of Canadian firms as well as their use of financial derivatives.

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.

We examine local labor markets in the United States and Canada from 1990 to 2011 using comparable household and business data. Wage levels and inequality rise with city population in both countries, albeit less in Canada.

Governor Stephen S. Poloz discusses the global financial reforms and what they mean for the future of finance.

Inflation-targeting frameworks have remained relatively stable over the past few years despite significant challenges, including prolonged low inflation, a large negative commodity price shock and rising financial stability concerns in some economies. The tools used by central banks have, however, evolved substantially. This article provides a survey of the developments in the inflation-targeting frameworks of 10 central banks in advanced economies that correspond to the three research areas of the Bank of Canada’s 2016 renewal: the level of the inflation target, the measurement of core inflation and financial stability considerations in the formulation of monetary policy.

We study the labour market and welfare effects of expanding unemployment insurance benefits and introducing payroll subsidies during the COVID-19 pandemic. We find that both policies are complementary and are beneficial to different types of workers. Payroll subsidies preserve the employment of workers in highly productive jobs, while unemployment insurance replaces lost income for workers who experience inevitable job loss.

The Canadian Survey of Consumer Expectations (CSCE) collects respondents’ views on inflation, the labour market and household finances. The survey for the first quarter of 2021 was conducted from February 15 to March 4, 2021. This period coincides with news of temporary delays in COVID-19 vaccinations in Canada and growing risks from new variants of the virus. The survey was completed before the most recent wave of infections and lockdowns in the largest provinces. Like the previous three surveys, the 2021 first-quarter survey included questions on the impacts of the pandemic and the measures to contain its spread. This survey also asked respondents about their expected economic and social activities once the majority of Canadians have received their COVID-19 vaccine. Similar to the report for the fourth quarter of 2020, this report also provides some details by demographic characteristics.

The uncertainty regarding inflation that is observed in density forecasts of households and professionals helps macroeconomists understand the formation mechanism of inflation expectations. Shocks to inflation take time to be perceived by all agents in the economy, and such rigidity is lower in a high-inflation environment.

The current international monetary system is in need of reform. This article first provides an assessment of the existing system, highlighting both its strengths and weaknesses. It notes that the system has not facilitated the symmetric and timely adjustment in the real exchange rate necessary to accommodate the integration of China and other emerging-market economies into the global economy. This lack of adjustment contributed to the global financial crisis and recession and, because it is forestalling the required rotation of global demand, is hindering the global recovery. The article then discusses reform of the system that would see all systemically important countries and currency areas adopt market-based and convertible floating exchange rates supported by appropriate monetary, fiscal and financial sector policy frameworks. It also examines the roles of the G-20 countries and major international financial institutions in promoting and facilitating the system’s transition.