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Budget rules can be defined as legislated or constitutional constraints on government deficits, taxes, expenditures, or debt. This paper reviews the budget rules recently legislated in six of Canada's provinces and both of its territories, as well as budget rules in other OECD countries.

Inventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output – it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance.

The secular decline in real interest rates has created a challenge for monetary policy, now confronting the zero lower bound more often. An increase in the supply of safe assets reduces downward pressure on the natural interest rate. This allows monetary policy to reach price stability and full employment, but not without cost—permanently lower investment.

This paper studies short-term forecasting of Canadian real GDP and its expenditure components using combinations of nowcasts from different models. Starting with a medium-sized data set, we use a suite of common nowcasting tools for quarterly real GDP and its expenditure components.

The three articles in this issue provide an overview of the monetary policy decision-making process at the Bank of Canada, a discussion of Bank research on the assessment of vulnerabilities in the financial system and a description of recent fragmentation in Canadian equity markets.

This paper studies how banks simultaneously manage the two sides of their balance sheet and its implications for bank risk taking and real economic activity. First, we analyze how changes in funding affect the supply of bank loans.

In order to understand what drives aggregate fluctuations, many macroeconomic models point to aggregate shocks and discount the contribution of firm-specific shocks. Recent research from other developed countries, however, has found that aggregate fluctuations are in part driven by idiosyncratic shocks to large firms.

The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation.