We examine the extent to which vertical and horizontal market structure can together explain incomplete retail pass-through.
Topics: Inflation and prices; Transmission of monetary policyThe Bank of Canada conducted a Wage Setting Survey with a sample of 200 private sector firms from mid-October 2007 to May 2008. Results indicate that wage adjustments for the Canadian non-union private workforce are overwhelmingly time dependent, with a fixed duration of one year, and are clustered in the first four months of the year, suggesting that wage stickiness may not be constant over the year.
Topics: Labour markets; Transmission of monetary policyWe study the cyclical properties of sales, regular price changes and average prices paid by consumers (“effective” prices) using data on prices and quantities sold for numerous retailers across many U.S. metropolitan areas.
Topics: Inflation and prices; Monetary policy framework; Transmission of monetary policyAn important channel in the transmission of monetary policy is the relationship between the short-term policy rate and long-term interest rates. Using a new term-structure model, the authors show that the variation in long-term interest rates over time consists of two components: one representing investor expectations of future policy rates, and another reflecting a term-structure risk premium that compensates investors for holding a risky asset. The time variation in the term-structure risk premium is countercyclical and largely determined by global macroeconomic conditions. As a result, long-term rates are pushed up during recessions and down during times of expansion. This is an important phenomenon that central banks need to take into account when using short-term rates as a policy tool.
Topics: Asset Pricing; Financial markets; Transmission of monetary policyWe explore the macroeconomic effects of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a time-varying parameter structural VAR model.
Topics: Econometric and statistical methods; Interest rates; Monetary policy framework; Transmission of monetary policyWe examine the evolution of the effects of monetary policy shocks on the distribution of disaggregate prices and quantities of personal consumption expenditures to assess the contribution of monetary policy to changes in U.S. inflation dynamics.
Topics: Econometric and statistical methods; Transmission of monetary policyUnderstanding how much of the increased debt load of Canadian households has been used to finance household spending on consumption and home renovation is important for the conduct of monetary policy. In this article, the authors use a comprehensive data set that provides information on the uses of debt by Canadian households. They first present some facts regarding the evolution of Canadian household debt over the period from 1999 to 2010, emphasizing the increased importance of debt flows that are secured by housing. They then explore how Canadian households have used their borrowed funds over the same period, and assess the role of these borrowed funds in financing total consumption and spending on home renovation. Finally, they examine the possible effects of a decline in house prices on consumption when housing equity is used as collateral against household indebtedness.
Topics: Credit and credit aggregates; Domestic demand and components; Transmission of monetary policyThis paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy.
Topics: Economic models; Financial Institutions; Financial system regulation and policies; Monetary policy framework; Transmission of monetary policyA view advanced in the aftermath of the late-2000s financial crisis is that lower than optimal interest rates lead to excessive risk taking by financial intermediaries.
Topics: Financial system regulation and policies; Transmission of monetary policyThe 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.
Topics: Economic models; Financial Institutions; Financial system regulation and policies; Transmission of monetary policyRecent New Keynesian models of macroeconomy view nominal cost rigidities, rather than nominal price rigidities, as the key feature that accounts for the observed persistence in output and inflation. Kryvtsov and Midrigan (2010a,b) reassess these conclusions by combining a theory based on nominal rigidities and storable goods with direct evidence on inventories for the U.S.
Topics: Business fluctuations and cycles; Transmission of monetary policyThis article begins with a brief examination of the Canadian mortgage market, focusing on the market’s evolution following changes to the Bank Act in 1992, which allowed chartered banks to enter the trust business, and the subsequent entrance of virtual banks and mortgage brokers. It then summarizes key research currently being undertaken by the Bank of Canada. This research suggests that the mortgage rates paid by borrowers depend on their observable characteristics, their local market, and their bargaining ability. Results also imply that mortgage-rate discounting affects the speed and amount of pass-through of changes in the central bank’s policy rate to mortgage rates. Findings also suggest that bank mergers can lead to asymmetric effects on mortgage rates.
Topics: Interest rates; Market structure and pricing; Transmission of monetary policyThe recent global crisis was characterized by a remarkable intensity in the negative feedback process between financial sector developments and the real economy. Exceptional measures were required to break this process, and the crisis stimulated interest in the relationship between financial sector developments, the real economy, and monetary policy. The authors examine this relationship by reviewing the relevant literature and then estimating a model with Canadian data. Both theoretical models and empirical findings point to the possibility of non-linear relationships between monetary policy, financial stress, and the real economy. The research indicates that when the economy can move into different regimes of financial stress, monetary policy can influence the likelihood of moving from one regime to another. It also implies that monetary policy actions have stronger effects when financial stress is high and that the tightening of monetary policy appears to have more powerful effects than easing.
Topics: Business fluctuations and cycles; Economic models; Transmission of monetary policyTo investigate the extent to which the transparency of the Bank of Canada's monetary policy has improved, the authors examine empirically – over the period 30 October 2000 to 31 May 2007 – the reaction of Canadian financial markets to official Bank communications, and in particular their reaction to the recent inclusion of forward-looking policy-rate guidance in these communications.
Topics: Central bank research; Interest rates; Transmission of monetary policyThe 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.
Topics: Interest rates; Monetary policy implementation; Transmission of monetary policyInventory investment is an important component of the Canadian business cycle. Despite its small average size – less than 1 per cent of output – it exhibits volatile procyclical fluctuations, accounting for almost one-third of output variance.
Topics: Business fluctuations and cycles; Transmission of monetary policyReal rigidities are an important feature of modern sticky price models and are policy-relevant because of their welfare consequences, but cannot be structurally identified from time series. I evaluate the plausibility of capital specificity as a source of real rigidities using a two-dimensional generalized (s,S) model calibrated to micro evidence.
Topics: Transmission of monetary policyWe estimate a New Keynesian general-equilibrium open economy model to examine how changes in oil prices affect the macroeconomy. Our model allows oil price changes to be transmitted through temporary demand and supply channels (affecting the output gap), as well as through persistent supply side effects (affecting trend growth).
Topics: Economic models; Interest rates; Potential output; Productivity; Transmission of monetary policySeveral authors have presented reduced-form evidence suggesting that the degree of exchange rate pass-through to the consumer price index has declined in Canada since the early 1980s and is currently close to zero.
Topics: Exchange rates; Transmission of monetary policyUsing Bayesian methods, we estimate a small open economy model in which consumers face limits to credit determined by the value of their housing stock. The purpose of this paper is to quantify the role of collateralized household debt in the Canadian business cycle.
Topics: Business fluctuations and cycles; Credit and credit aggregates; Transmission of monetary policyI present a structural econometric analysis supporting the hypothesis that money is still relevant for shaping inflation and output dynamics in the United States. In particular, I find that real money balance effects are quantitatively important, although smaller than they used to be in the early postwar period.
Topics: Business fluctuations and cycles; Monetary aggregates; Transmission of monetary policyWe study a model with repeated moral hazard where financial contracts are not fully indexed to inflation because nominal prices are observed with delay as in Jovanovic & Ueda (1997). More constrained firms sign contracts that are less indexed to the nominal price and, as a result, their investment is more sensitive to nominal price [...]
Topics: Economic models; Financial markets; Monetary policy framework; Transmission of monetary policyModels with imperfect information that generate persistent monetary nonneutrality predominantly rely on assumptions leading to substantial heterogeneity of information across price-setters. This paper develops a quantitative general equilibrium model in which the degree of heterogeneity of information is determined endogenously. In the model, firms use two technologies to acquire information: costly updating to full information [...]
Topics: Business fluctuations and cycles; Inflation and prices; Transmission of monetary policyKryvtsov and Midrigan (2008) study the behavior of inventories in an economy with menu costs, fixed ordering costs and the possibility of stock-outs. This paper extends their analysis to a richer setting that is capable of more closely accounting for the dynamics of the US business cycle. We find that the original conclusion survives in [...]
Topics: Business fluctuations and cycles; Transmission of monetary policyCommodity prices have increased dramatically and persistently over the past several years, followed by a sharp reversal in recent months. These large and persistent movements in commodity prices raise questions about their implications for global inflation. The process of globalization has motivated much debate over whether global factors have become more important in driving the [...]
Topics: Business fluctuations and cycles; Economic models; Inflation and prices; International topics; Transmission of monetary policy
