Search

In the interbank market, banks will sometimes trade below the central bank's deposit rate. We explain this anomaly using a theory based on market frictions and relationship lending.

Policy implications are derived for an inflation-targeting central bank, whose credibility is endogenous and depends on its past ability to achieve its targets. This is done in a New Keynesian framework with heterogeneous and boundedly rational expectations.

We produce forecasts for four risk scenarios to consider their usefulness for monitoring the Canadian economy. We find a high-oil-price scenario benefits the economy, a US recession induces a slowdown, a tight labor market leads to price increases, and a restrictive monetary policy scenario increases the unemployment rate while lowering the inflation rate.

We offer a theory of how inefficiently lax financial regulation could arise in a democratic society.

We explore the idea that the financial sector can be a source of non-fundamental risk to the rest of the economy. We also consider whether policy can be used to reduce this risk—either by increasing the supply of publicly backed safe assets or by reducing the demand for safe assets.

In this note, we find that valuation effects can act as an important stabilizer, strengthening Canada’s net external wealth when its economic outlook worsens relative to that of other countries.

We measure the prevalence of zombie firms in Canada and assess how they could potentially affect the financial system.

The cost of borrowing Government of Canada treasury bills (t-bills) in the repurchase (repo) market is mainly explained by the relationship between the parties involved. Some pairs of parties conduct most of their repos for t-bills rather than bonds, and at relatively high borrowing costs. We speculate that these pairs have formed a mutually beneficial service relationship in which one party consistently receives t-bills, while the other receives cash at a relatively cheap rate.

In 1995, the broad aggregate M2+ grew at an annual rate of 4.5 per cent—almost twice the rate recorded in 1994—as competition from mutual funds drew less money from personal savings deposits. An adjusted M2+ aggregate, which internalizes the effect of close substitutes such as CSBs and certain mutual funds, grew by only 3.4 per cent. Gross M1 grew by 8.2 per cent during the year, reflecting an increased demand for transactions balances as market interest rates declined and as banks offered more attractive rates of interest on corporate current account balances. The robust growth of gross M1 in the second half of 1995 suggests a moderate expansion of economic activity in the first half of 1996, while moderate growth in the broad aggregates indicates a rate of monetary expansion consistent with continued low inflation. In this annual review of the monetary aggregates, the authors also introduce a new model, based on calculated deviations of M1 from its long-run demand, which suggests that inflation should remain just below the midpoint of the inflation-control target range over the next couple of years.