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This article provides an overview of the Bank of Canada's new economic model, the Quarterly Projection Model (QPM), which has been under development at the Bank since 1989. The model has two roles. It is used to make economic projections, which are conducted quarterly and form an important basis for discussions of monetary policy between staff and senior management. QPM is also a research tool: it was developed to analyse important changes to the economy or macroeconomic policies which require a deeper understanding of long-term economic forces. The model pays particular attention to factors shaping long-term equilibrium, such as stocks of wealth, capital, government debt and net foreign assets. Various sources of dynamics, including the adjustment of forward-looking expectations, operate to determine the transition path to equilibrium and the consistency of expectations. The article discusses the history of QPM and earlier economic models at the Bank, and provides a simple overview of how the model works.

The Canadian economy expanded at an average rate of over 4 per cent through the second half of 1996 and the first three quarters of 1997. The expansion was supported by accommodative monetary conditions, substantial employment gains, low inflation, an improved fiscal postion, and strong U.S. demand. These factors will continue to underpin a scenario of sustained growth in output and employment in the period ahead. With the situation in Asia still evolving, it is difficult to be precise about the size of its overall impact on Canada. At the same time, there have been some positive developments including stronger-than-anticipated economic performance in the United States, Mexico, and Europe and declining longer-term interest rates in most industrial countries. The core rate of inflation slipped slightly below the 1 to 3 per cent target range in the closing months of 1997. With the unwinding of some of the special factors that contributed to the decline, trend inflation is expected to move back inside the range in coming months.

Long-term Canada-U.S. interest spreads have changed remarkably during the 1990s. The unusually wide spreads of the first half of the decade have given way to an unprecedented run of negative yield differentials. In this article, the author examines the conceptual aspects of yields on international assets and their application to the Canada-U.S. situation. Prior to 1995, investors were unsure that, over the long run, inflation would meet the targets set by the government and the Bank. Policy credibility was undermined by large budget deficits and political uncertainty. In the second half of the decade, confidence was re-established as the fiscal positions of governments improved, long-run price stability became established, and political concerns about Quebec lessened. As long as these fundamentals hold, long-term rates should remain relatively low, even when short-term rates rise.

Canada has not been alone in making substantial progress towards price stability. Average inflation in the industrialized countries fell markedly in the first half of the 1990s, the third such episode of broad-based disinflation in the last 20 years. By the latter part of 1994, inflation in many countries had fallen to rates that had not been sustained since the early 1960s, generally converging to within a range of 1 to 3 per cent. Despite the decline in inflation to similar low levels, there were a number of interesting developments across the industrialized countries. For example, the pace of disinflation slowed noticeably after 1992 despite continued weak demand conditions. Inflation in countries that experienced a sharp depreciation in their exchange rates in the first half of the 1990s was, on average, no higher than elsewhere. The author identifies various factors affecting inflation outcomes in the industrialized countries. These include special factors, such as changes to indirect taxes, as well as more fundamental determinants of inflation, including the degree of economic slack. The presence of these factors, and perhaps the way in which inflation responded to them, varied across countries. One common element, however, was an increased commitment by monetary authorities across the industrialized economies to the goal of achieving and maintaining price stability.

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.

As a guide for the conduct of monetary policy, most central banks make use of a trend inflation index similar to that employed by the Bank of Canada: the CPI excluding food, energy, and the effect of indirect taxes. In addition to their basic reference index, some central banks regularly publish statistical measures of the trend rate of inflation. The method used for producing these measures is, for the most part, based on the hypothesis that extreme price fluctuations generally reflect temporary shocks to the inflation rate, rather than its underlying trend. In this paper, the author offers a broad survey of studies on the measurement of trend inflation that have been published by the Bank of Canada and presents the results of the most recent work on the subject. Particular attention is paid to two statistical measures that the Bank follows more closely than other measures; namely, the CPIX, a price index that excludes eight of the most volatile CPI components, and CPIW, a measure that retains all the components of the overall index but gives a lower weighting to the most volatile.

Decomposing total inflation in Canada as measured by the consumer price index (CPI) into its key macroeconomic factors, as presented in the most recent Monetary Policy Report, is an interesting exercise that shows how the exchange rate pass-through, commodity prices and the output gap have influenced the evolution of the total inflation rate over time. This aggregate approach, however, may mask important sectoral changes.

From 2011 to 2019, inflation in Canada and advanced economies usually registered below inflation targets, spurring the debate on whether the inflation process has changed. This paper highlights emerging questions that will influence the conduct of monetary policy in Canada in the near term.

In this paper, we discuss whether the ability of individuals to convert commercial bank money (i.e., bank deposits) into central bank money is fundamentally important for the monetary system.

In this note, we provide a brief outline of the recent developments in wage measures in Canada. We then assess whether wage growth is consistent with its fundamentals.