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Can daycare replace parents’ time spent with children? We explore this by using data on how parents spend time and money on children and how this spending is related to their child’s development.

We introduce bounded rationality in a canonical New Keynesian model calibrated to match Canadian macroeconomic data since Canada’s adoption of inflation targeting. We use the model to quantitatively assess the macroeconomic impact of alternative monetary policy regimes.

This issue of the Financial System Review reflects the Bank’s judgment that household indebtedness and housing market imbalances–the most important vulnerabilities for the Canadian financial system–have moved higher over the past six months. However, the financial system remains resilient, and macroeconomic conditions continue to improve. Other vulnerabilities discussed in this FSR are fragile fixed-income market liquidity and the capacity of an interconnected financial system to mitigate cyber threats.

The consumer price index (CPI) is the most commonly used measure to track changes in the overall level of prices. Since it departs from a true cost-of-living index, the CPI is subject to four types of measurement bias—commodity substitution, outlet substitution, new goods and quality adjustment. The author updates previous Bank of Canada estimates of measurement bias in the Canadian CPI by examining these four sources of potential bias. He finds the total measurement bias over the 2005–11 period to be about 0.5 percentage point per year, consistent with the Bank’s earlier findings. Slightly more than half of this bias is caused by the fixed nature of the CPI basket of goods and services.

Developments are underway to replace Canada’s two core payment systems with three new systems. We use a discrete choice model to predict migration patterns of end-users and financial institutions for future systems and discuss their policy implications.

I use a structural vector autoregression (SVAR) with sign restrictions to provide conditional evidence on the behavior of the US external finance premium (EFP). The results indicate that the excess bond premium, a proxy for the EFP, reacts countercyclically to supply and monetary policy shocks and procyclically to demand shocks.

How do banks adjust their loan rate markup in response to macroeconomic shocks?

Deputy Governor Sylvain Leduc discusses how upgrading Canada’s core payment systems will contribute to financial stability and help the Bank keep inflation on target.

We build upon new developments in the international trade literature to isolate and quantify the long-run economic impacts of tariff changes on the United States and the global economy.