August 18, 2011 Introducing Multiple Interest rates in ToTEM Bank of Canada Review - Summer 2011 José Dorich, Rhys R. Mendes, Yang Zhang This article describes changes to the structure of ToTEM—the Bank of Canada’s main model for projection and policy analysis—that allow an independent role for long-term interest rates, as well as for the risk spreads that lead to differences in the interest rates faced by households, firms and the government. These changes broaden the range of policy questions that the model can address and improve its ability to explain data. The authors use the model to simulate the effects of shocks to the risk spreads on interest rates similar to those that occurred during the recent financial crisis. They also use the model to assess the macroeconomic impact of higher requirements for bank capital and liquidity. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Financial system regulation and policies, Interest rates
August 18, 2011 The BoC-GEM-Fin: Banking in the Global Economy Bank of Canada Review - Summer 2011 Carlos De Resende, René Lalonde This article describes the Bank of Canada’s version of the Global Economy Model structured to incorporate an active banking system that features an interbank market and cross-border lending. After describing the new model, the authors use it to examine the responses of selected U.S. and Canadian macroeconomic variables to a “credit crunch” in the United States and also to study the impact of changes in the regulatory limits to bank leverage in Canada. They also discuss the relative merits of a monetary policy framework based on inflation targeting and one based on price-level targeting in the presence of shocks to the U.S. and Canadian banking sectors. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Financial institutions, Financial system regulation and policies, Monetary policy framework
August 18, 2011 Bank Balance Sheets, Deleveraging and the Transmission Mechanism Bank of Canada Review - Summer 2011 Césaire Meh The author investigates the influence of bank capital on economic activity, using a macroeconomic model that incorporates an explicit role for financial intermediation. The analysis focuses on the role of a “bank-capital channel” in propagating and amplifying monetary policy actions and other shocks. The question of whether weaker bank balance sheets make the economy more vulnerable to adverse shocks is examined, together with the impact of initiatives, such as countercyclical capital buffers, on the transmission of monetary policy and other shocks to the real economy. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Financial institutions, Financial system regulation and policies, Monetary policy transmission
August 18, 2011 Mortgage Debt and Procyclicality in the Housing Market Bank of Canada Review - Summer 2011 Ian Christensen This article focuses on the role that loans backed by housing collateral play in amplifying housing booms and, more generally, procyclicality in the housing market. The author uses a model developed to include borrower and lender households, as well as a housing market, to examine the impact that altering the loan-to-value ratio (either permanently or countercyclically) might have on the volatility of house prices and mortgage debt. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Economic models, Financial system regulation and policies, Market structure and pricing
August 18, 2011 Developing a Medium-Term Debt-Management Strategy for the Government of Canada Bank of Canada Review - Summer 2011 Marc Larson, Étienne Lessard As the Government of Canada’s fiscal agent, the Bank of Canada provides strategic policy advice on the management of the government’s debt, in addition to being responsible for conducting debt-management operations. In this article, the authors review the evolution of the debt strategy over the past 20 years and outline the complex process of developing a sound strategy that balances various cost and risk considerations. This includes an examination of the tools and practices used to develop the new medium-term debt-management strategy, such as the modelling approach involved, market consultations and various debt-management metrics. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Debt management, Economic models
May 19, 2011 Understanding and Measuring Liquidity Risk: A Selection of Recent Research Bank of Canada Review - Spring 2011 Céline Gauthier, Hajime Tomura During the recent financial crisis, one of the forces set in motion by the initial losses on subprime-mortgage loans was a significant decline in the market liquidity of assets and in the ability of financial institutions to obtain funding in wholesale markets. In this article, the authors summarize recent research that clarifies the role of liquidity in destabilizing the financial system and examine the implications of this research for the recently announced financial system reforms, including Basel III. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Financial system regulation and policies
May 19, 2011 Unconventional Monetary Policy: The International Experience with Central Bank Asset Purchases Bank of Canada Review - Spring 2011 Sharon Kozicki, Lena Suchanek, Eric Santor As part of their policy response to the financial crisis of 2007–09, central banks introduced numerous unprecedented monetary policy measures to provide monetary easing. This article defines and documents these measures, focusing on central bank asset purchases and their impact on central bank balance sheets. It then discusses the challenges of identifying the effects of these measures and explores possible exit strategies. The potential costs of these policies are also analyzed, as well as the broader implications for monetary policy frameworks. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Central bank research, Financial markets, International topics, Monetary policy framework
May 19, 2011 Lessons from the Use of Extraordinary Central Bank Liquidity Facilities Bank of Canada Review - Spring 2011 Stéphane Lavoie, Alex Sebastian, Virginie Traclet The recent crisis was characterized by widespread deterioration in funding conditions, as well as impairment of the mechanism through which liquidity is normally redistributed within the financial system. Central banks responded with extraordinary measures. This article examines the provision of liquidity by central banks during the crisis as they adapted their existing facilities and introduced new ones, while encouraging a return to private markets and mitigating moral hazard. A review of this experience illustrates the importance of clear principles for intervention, a flexible operating framework, and clear communication and co-operation by central banks. By exposing the degree of interdependence of financial institutions and markets, the crisis highlighted the need for reforms aimed at improving the infrastructure supporting core funding markets and the liquidity of individual institutions. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Lender of last resort
May 19, 2011 Central Bank Collateral Policy: Insights from Recent Experience Bank of Canada Review - Spring 2011 Lorie Zorn, Alejandro García The collateral policy of central banks played a critical role during the recent financial crisis, as they worked to bolster liquidity and alleviate the funding pressures facing financial institutions. This article examines central bank collateral policy and discusses three areas in which central banks can use their collateral policy to influence financial market practices: promoting greater transparency for securitized products, improving practices related to credit risk, and reducing procyclicality in the management of market risk. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial stability, Payment clearing and settlement systems
May 19, 2011 Supplementary article: Paying with Polymer: Developing Canada’s New Bank Notes Bank of Canada Review - Spring 2011 Charles Spencer In this article, author Charles Spencer reviews the complex process of developing the new series, which represents a dramatic change for Canada. The leading-edge security features made possible by the new substrate, the cost savings of the move to a polymer base and the environmental advantages of the new notes are also examined. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Bank notes, Credibility, Payment clearing and settlement systems