Central Bank Haircut Policy Staff Working Paper 2010-23 James Chapman, Jonathan Chiu, Miguel Molico We present a model of central bank collateralized lending to study the optimal choice of the haircut policy. We show that a lending facility provides a bundle of two types of insurance: insurance against liquidity risk as well as insurance against downside risk of the collateral. Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Financial services, Financial system regulation and policies, Monetary policy implementation, Payment clearing and settlement systems JEL Code(s): E, E4, E40, E5, E50
Evaluating the Effect of the Bank of Canada's Conditional Commitment Policy Staff Discussion Paper 2010-11 Zhongfang He The author evaluates the effect of the Bank of Canada's conditional commitment regarding the target overnight rate on longer-term market interest rates by taking into account the relationship between interest rates, inflation, and unemployment rates. Content Type(s): Staff research, Staff discussion papers Topic(s): Interest rates, Monetary policy implementation, Monetary policy transmission JEL Code(s): E, E4, E5, E6
Alternative Optimized Monetary Policy Rules in Multi-Sector Small Open Economies: The Role of Real Rigidities Staff Working Paper 2010-9 Carlos De Resende, Ali Dib, Maral Kichian Inflation-targeting central banks around the world often state their inflation objectives with regard to the consumer price index (CPI). Yet the literature on optimal monetary policy based on models with nominal rigidities and more than one sector suggests that CPI inflation is not always the best choice from a social welfare perspective. Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, Inflation targets, Inflation: costs and benefits, Monetary policy framework, Monetary policy implementation JEL Code(s): E, E4, E5, E52, F, F3, F4
March 9, 2010 Inflation Expectations and the Conduct of Monetary Policy: A Review of Recent Evidence and Experience Bank of Canada Review - Spring 2010 Rose Cunningham, Brigitte Desroches, Eric Santor This article explores the role of inflation expectations in the conduct of monetary policy. It reviews the various measures of inflation expectations used by central banks, including surveys and market-based indicators, and considers their advantages and disadvantages. It examines the critical role of inflation expectations in the framework that central banks use to understand, forecast, and control inflation. It also looks at their role as an indicator of central bank credibility. The behaviour of inflation expectations over the past two years is analyzed and policy conclusions are offered. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation targets, Monetary policy implementation
Adopting Price-Level Targeting under Imperfect Credibility in ToTEM Staff Working Paper 2009-17 Gino Cateau, Oleksiy Kryvtsov, Malik Shukayev, Alexander Ueberfeldt Using the Bank of Canada's main projection and policy-analysis model, ToTEM, this paper measures the welfare gains of switching from inflation targeting to price-level targeting under imperfect credibility. Following the policy change, private agents assign a probability to the event that the policy-maker will revert to inflation-targeting next period. Content Type(s): Staff research, Staff working papers Topic(s): Monetary policy framework, Monetary policy implementation JEL Code(s): E, E3, E31, E5, E52
Monetary Policy Lag, Zero Lower Bound, and Inflation Targeting Staff Working Paper 2009-2 Shin-Ichi Nishiyama Although the concept of monetary policy lag has historical roots deep in the monetary economics literature, relatively little attention has been paid to the idea. In this paper, we build on Svensson's (1997) inflation targeting framework by explicitly taking into account the lagged effect of monetary policy and characterize the optimal monetary policy reaction function both in the absence and in the presence of the zero lower bound on the nominal interest rate. Content Type(s): Staff research, Staff working papers Topic(s): Inflation targets, Monetary policy framework, Monetary policy implementation JEL Code(s): C, C6, C63, E, E5, E52, E58
The Implementation of Monetary Policy in Canada Staff Discussion Paper 2008-9 Walter Engert, Toni Gravelle, Donna Howard The authors present a detailed discussion of the Bank of Canada's framework for the implementation of monetary policy. As background, they provide a brief overview of the financial system in Canada, including a discussion of the financial services industry and the money market. Content Type(s): Staff research, Staff discussion papers Topic(s): Financial institutions, Financial markets, Monetary policy implementation, Payment clearing and settlement systems JEL Code(s): E, E5, E52, E58, G, G2, G21
December 11, 2007 The Zero Bound on Nominal Interest Rates: Implications for Monetary Policy Bank of Canada Review - Winter 2007-2008 Claude Lavoie, Stephen Murchison One of the most important factors that must be considered if countries are thinking about lowering the target level of inflation much below 2 per cent is the zero interest bound. Targeting inflation rates that are too low, the authors note, may restrict the ability of monetary policy to respond to economic shocks by limiting the amount by which interest rates can be eased. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation: costs and benefits, Interest rates, Monetary policy implementation
April 14, 2007 The Canadian Overnight Market: Recent Evolution and Structural Changes Bank of Canada Review - Spring 2007 Christopher Reid Since 1997 when the Bank of Canada last published a review of the Canadian overnight market, several important changes have affected the market's structure and dynamics. Reid provides a current overview of the market, examining the financial instruments, market transparency and flows, and the collateralized overnight rate as it has evolved since the introduction of the Large Value Transfer System and the fixed announcement dates. Other significant influences include changes in market practices regarding risk management, the rise of securities lending, the increased demand for collateral, and the Bank of Canada's measures to reinforce the target for the overnight rate. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Market structure and pricing, Monetary policy framework, Monetary policy implementation
Perhaps the FOMC Did What It Said It Did: An Alternative Interpretation of the Great Inflation Staff Working Paper 2007-19 Sharon Kozicki, P. A. Tinsley This paper uses real-time briefing forecasts prepared for the Federal Open Market Committee (FOMC) to provide estimates of historical changes in the design of U.S. monetary policy and in the implied central-bank target for inflation. Empirical results support a description of policy with an effective inflation target of roughly 7 percent in the 1970s. Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Monetary aggregates, Monetary policy implementation JEL Code(s): E, E3, E5, N, N1