Potential output and the neutral rate in Canada: 2022 reassessment Staff analytical note 2022-3 Guyllaume Faucher, Christopher Hajzler, Martin Kuncl, Dmitry Matveev, Youngmin Park, Temel Taskin We expect potential output growth to be lower in 2021 than anticipated in the April 2021 assessment. By 2025, growth is expected to reach 2.3%. We assess that the Canadian nominal neutral rate increased slightly to lie in the range of 2.00% to 3.00%. Content Type(s): Staff research, Staff analytical notes Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Real economy and forecasting, Structural challenges, Demographics and labour supply
Real Exchange Rate Decompositions Staff discussion paper 2022-6 Bruno Feunou, Jean-Sébastien Fontaine, Ingomar Krohn We break down the exchange rate based on an explicit link between fixed income and currency markets. We isolate a foreign exchange risk premium and show it is the main driver of the exchange rate between the Canadian and US dollars, especially on monetary policy and macroeconomic news announcement days. Content Type(s): Staff research, Staff discussion papers JEL Code(s): E, E4, E43, F, F3, F31, G, G1, G12 Research Theme(s): Financial markets and funds management, International markets and currencies, Market functioning, Monetary policy, Monetary policy framework and transmission
Household Heterogeneity and the Performance of Monetary Policy Frameworks Staff working paper 2022-12 Edouard Djeutem, Mario He, Abeer Reza, Yang Zhang Consumption inequality and a low interest rate environment are two important trends in today’s economy. But the implications they may have—and how those implications interact—within different monetary policy frameworks are not well understood. We study the ranking of alternative frameworks that take these trends into account. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D3, D31, D5, D52, E, E2, E21, E3, E31, E5, E52, E58 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission
The Central Bank Strikes Back! Credibility of Monetary Policy under Fiscal Influence Staff working paper 2022-11 Antoine Camous, Dmitry Matveev Central banks in many advanced economies enjoy a high degree of independence, which protects monetary policy decisions from political influence. But how should independent central banks react if pressured by fiscal policy-makers? We examine whether a central bank should design a monetary policy framework that prescribes acting conditionally on how fiscal policy behaves. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E0, E02, E5, E52, E58, E6, E61, E62 Research Theme(s): Financial system, Financial stability and systemic risk, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Monetary policy tools and implementation
A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality Staff discussion paper 2022-4 Joel Wagner, Tudor Schlanger, Yang Zhang 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. Content Type(s): Staff research, Staff discussion papers JEL Code(s): E, E2, E27, E3, E4, E5, E52, E58 Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
Monetary Policy and Redistribution in Open Economies Staff working paper 2022-6 Xing Guo, Pablo Ottonello, Diego Perez We study how different types of monetary policy shape the distributional effects of external economic shocks on households’ consumption in a small open economy. Our results present a trade-off between maintaining overall stabilization and controlling consumption inequality. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E3, E32, E5, E52, F, F4, F41, F44 Research Theme(s): Financial system, Financial institutions and intermediation, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Structural challenges, International trade, finance and competitiveness
Heterogeneity and Monetary Policy: A Thematic Review Staff discussion paper 2022-2 Felipe Alves, Christian Bustamante, Xing Guo, Katya Kartashova, Soyoung Lee, Thomas Michael Pugh, Kurt See, Yaz Terajima, Alexander Ueberfeldt The theory that rich economic diversity of businesses and households both affects and is shaped by economy-wide fluctuations has strong implications for monetary policy. This review places these insights in a Canadian context. Content Type(s): Staff research, Staff discussion papers JEL Code(s): D, D2, D25, D3, D31, E, E2, E22, E24, E5, E50, E52 Research Theme(s): Financial system, Household and business credit, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
On the Wedge Between the PPI and CPI Inflation Indicators Staff working paper 2022-5 Shang-Jin Wei, Yinxi Xie We find that the CPI and PPI inflation indexes co-moved strongly throughout the late 20th century, but their correlation has fallen substantially since the early 2000s. We offer a structural explanation for this divergence based on the growth of global supply chains since 2000. This finding offers a unique perspective for the future design of optimal monetary policy. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E3, E31, E5, E52, E58, F, F1, F11, F12, F4, F41, F6, F62 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission, Structural challenges, International trade, finance and competitiveness
Firm Inattention and the Efficacy of Monetary Policy: A Text-Based Approach Staff working paper 2022-3 Wenting Song, Samuel Stern How much attention do firms pay to macroeconomic news? Through a novel text-based measure, two facts emerge. First, attention is polarized. Most firms either never or always pay attention to economic conditions. Second, it is countercyclical. During recessions, more firms pay attention, and firms pay greater attention to macroeconomic news. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D8, D83, E, E4, E44, E5, E52 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission
Central Bank Digital Currency and Banking: Macroeconomic Benefits of a Cash-Like Design Staff working paper 2021-63 Jonathan Chiu, Mohammad Davoodalhosseini Should a CBDC be more like cash or bank deposits? An interest-bearing, cash-like CBDC not only makes payments more efficient but also increases total demand. This has positive effects on other transactions, inducing more deposit taking and lending and, thus, bank intermediation. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E5, E50, E58 Research Theme(s): Financial system, Financial stability and systemic risk, Monetary policy, Monetary policy framework and transmission, Money and payments, Digital assets and fintech, Payment and financial market infrastructures