Harnessing the benefit of state-contingent forward guidance Staff analytical note 2022-13 Vivian Chu, Yang Zhang A low level of the neutral rate of interest increases the likelihood that a central bank’s policy rate will reach its effective lower bound (ELB) in future economic downturns. In a low neutral rate environment, using an extended monetary policy toolkit including forward guidance helps address the ELB challenge. Using the Bank’s Terms-of-Trade Economic Model, we assess the benefits and limitations of a state-contingent forward guidance implemented within a flexible inflation targeting framework. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E2, E27, E3, E37, E4, E5, E52, E58 Research Theme(s): Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission, Monetary policy tools and implementation
The Central Bank’s Dilemma: Look Through Supply Shocks or Control Inflation Expectations? Staff working paper 2022-41 Paul Beaudry, Thomas J. Carter, Amartya Lahiri When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and then explore optimal policy under a range of assumptions about how expectations are formed. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E1, E12, E2, E24, E3, E31, E5, E52, E58, E6, E65 Research Theme(s): Models and tools, Economic models, Monetary policy, Inflation dynamics and pressures, Monetary policy framework and transmission
Windfall Income Shocks with Finite Planning Horizons Staff working paper 2022-40 Michael Boutros How do households respond when they receive unanticipated income, such as an inheritance or government stimulus cheque? This paper studies these windfall income shocks through a model of household behaviour that generates a realistic consumption response for households along the entire distribution of wealth. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D9, D91, E, E2, E21, G, G5, G51 Research Theme(s): Financial system, Household and business credit, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
How Do People View Price and Wage Inflation? Staff working paper 2022-34 Monica Jain, Olena Kostyshyna, Xu Zhang This paper examines household-level data from the Canadian Survey of Consumer Expectations (CSCE) to understand households’ expectations about price and wage inflation, how those expectations link to views about labour market conditions and the subsequent impact on households’ outlook for real spending growth. Content Type(s): Staff research, Staff working papers JEL Code(s): C, C8, C83, D, D8, D84, E, E2, E21, E24, E3, E31 Research Theme(s): Monetary policy, Inflation dynamics and pressures, Real economy and forecasting
Endogenous Liquidity and Capital Reallocation Staff working paper 2022-27 Wei Cui, Randall Wright, Yu Zhu We study economies where firms acquire capital in primary markets then retrade it in secondary markets after information on idiosyncratic productivity arrives. Our secondary markets incorporate bilateral trade with search, bargaining and liquidity frictions. Content Type(s): Staff research, Staff working papers JEL Code(s): E, E2, E22, E4, E44 Research Theme(s): Financial markets and funds management, Market functioning, Financial system, Household and business credit, Models and tools, Economic models, Monetary policy, Monetary policy framework and transmission
How well can large banks in Canada withstand a severe economic downturn? Staff analytical note 2022-6 Andisheh (Andy) Danaee, Harsimran Grewal, Brad Howell, Guillaume Ouellet Leblanc, Xuezhi Liu, Mayur Patel, Xiangjin Shen We examine the potential impacts of a severe economic shock on the resilience of major banks in Canada. We find these banks would suffer significant financial losses but nevertheless remain resilient. This underscores the role well-capitalized banks and sound underwriting practices play in supporting economic activity in a downturn. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E2, E27, E3, E37, E4, E44, G, G1, G2, G21, G23 Research Theme(s): Financial system, Financial institutions and intermediation, Financial stability and systemic risk
Assessing global potential output growth and the US neutral rate: April 2022 Staff analytical note 2022-4 Kyle Boutilier, Thomas J. Carter, Xin Scott Chen, Eshini Ekanayake, Louis Poirier, Peter Shannon, Akash Uppal, Lin Xiang We expect global potential output growth to increase from 2.7% in 2021 to 2.9% by 2024. Compared with the April 2021 assessment, global potential output growth is marginally slower. The current range for the US neutral rate is 2% to 3%, 0.25 percentage points higher than staff’s last assessment. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E1, E2, E4, E5, F, F0, O, O4 Research Theme(s): Monetary policy, Monetary policy framework and transmission, Real economy and forecasting
Benchmarks for assessing labour market health Staff analytical note 2022-2 Erik Ens, Corinne Luu, Kurt See, Shu Lin Wee We propose a range of benchmarks for assessing labour market strength for monetary policy. This work builds on a previous framework that considers how diverse and segmented the labour market is. We apply these benchmarks to the Canadian labour market and find that it has more than recovered from the COVID-19 shock. Content Type(s): Staff research, Staff analytical notes JEL Code(s): E, E2, E24, J, J2, J21, J6 Research Theme(s): Monetary policy, Real economy and forecasting, Structural challenges, Demographics and labour supply
Contribution of Human Capital Accumulation to Canadian Economic Growth Staff discussion paper 2022-7 Audra Bowlus, Youngmin Park, Chris Robinson This paper quantifies the contribution of human capital accumulation to the growth of real gross domestic product (GDP) in Canada. Content Type(s): Staff research, Staff discussion papers JEL Code(s): D, D2, D24, E, E2, E24, J, J2, J24, J3, J31, O, O4, O47 Research Theme(s): Monetary policy, Real economy and forecasting, Structural challenges, Demographics and labour supply, Digitalization and productivity
Job Ladder and Business Cycles Staff working paper 2022-14 Felipe Alves During downturns, workers get stuck in low-productivity jobs and wages remain stagnant. I build an heterogenous agent incomplete market model with a full job ladder that accounts for these facts. An adverse financial shock calibrated to the US Great Recession replicates the period’s slow recovery and missing disinflation. Content Type(s): Staff research, Staff working papers JEL Code(s): D, D3, D31, D5, D52, E, E2, E21, E24, E3, E31, E32 Research Theme(s): Models and tools, Economic models, Monetary policy, Real economy and forecasting, Structural challenges, Demographics and labour supply