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8636 Results

August 15, 2000

Restructuring in the Canadian Economy: A Survey of Firms

Towards the end of the 1980s and into the early 1990s, the Canadian economy experienced a number of structural changes. These included free trade agreements (both the FTA and NAFTA), significant technological advances, deregulation in many sectors of the economy, the arrival of large, U.S.-based retailers, and the introduction of the GST.
August 14, 2000

Approaches to Current Stock Market Valuations

The increase in North American stock prices in 1999 and early 2000 has generated interest in the valuation assumptions that would make these price levels sustainable. Here, commonly used valuation techniques are applied to stock markets in Canada and the United States. For the comparative yield approach, real interest rates (rather than nominal rates) are preferred as the comparator of choice to yields on stock market indexes. The spreads between real interest rates and stock market yields have generally increased over the last two years. The dividend-discount model (DDM) approach provides an analytic linkage between the equity-risk premium and the expected growth of dividends. It suggests that market values (measured at the end of February 2000) could be sustained only by rapid growth of dividends in the future or by the continued assumption of an uncharacteristically low risk premium on equity. The spectacular rise in the value of technology stocks in 1999 is noted (Chart 4), and then the valuation measures for the Canadian stock market excluding the technology sector are examined. When this is done with the comparative yield approach, yield spreads are slightly lower, and for the DDM approach, one does not need to assume as high a growth of dividends or as low a risk premium to validate market valuations. Two effects of the "new economy" on the stock market are noted. One is the lowering of dividend yields, as new-economy technology companies tend to have a high reinvestment rate and a low dividend payout rate. Another relates to the potential for a higher track for the economy's productivity growth, which would mean that higher-than-historical assumptions about future earnings growth would be more plausible. Several explanations for the decline in risk premiums on equity are considered. While short-term volatility in the stock market has, if anything, increased in recent years, low inflation and improved economic performance, along with demographics and investor preferences, may have contributed to a decline in the risk premium demanded by investors. A scenario of rapid growth of dividends in the near term slowing to historical norms in the longer term is examined. While this approach can go partway towards explaining high stock market valuations, it requires assumptions that are outside historical experience.

Volatility Transmission Between Foreign Exchange and Money Markets

Staff Working Paper 2000-16 Shafiq K. Ebrahim
This paper uses trivariate generalized autoregressive conditional heteroscedasticity (GARCH) models to study price and volatility spillovers between the foreign exchange and associated money markets. Three models are estimated using data on U.S. dollar/Canadian dollar, U.S. dollar/Deutsche mark, and U.S. dollar/Japanese yen daily exchange rate returns together with returns on 90-day Eurodollar, Euro Canada, Euromark, and Euroyen deposits.
Content Type(s): Staff research, Staff working papers Topic(s): International financial markets JEL Code(s): G, G1, G15

Private Capital Flows, Financial Development, and Economic Growth in Developing Countries

Staff Working Paper 2000-15 Jeannine Bailliu
An important issue in the debate over the desirability of freer capital mobility for developing countries is whether capital flows have significant effects on economic growth. Proponents of capital account liberalization cite the growth-promoting attributes of capital inflows as a key benefit of financial integration for developing countries.
Content Type(s): Staff research, Staff working papers Topic(s): International topics JEL Code(s): F, F2, F21, F4, F43, O, O5, O50

Employment Effects Of Nominal-Wage Rigidity: An Examination Using Wage-Settlements Data

Staff Working Paper 2000-14 Umar Faruqui
The argument advocating a moderate level of inflation based on the downward nominal-wage rigidity (DNWR) hypothesis rests on three factors: its presence, extent, and negative impact in the labour market. This paper focuses on the employment effect of DNWR.
Content Type(s): Staff research, Staff working papers Topic(s): Labour markets JEL Code(s): C, C2, C23, J, J2, J23, J3, J30
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