E3 - Prices, Business Fluctuations, and Cycles
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Downward Nominal Wage Rigidity Meets the Zero Lower Bound
We add downward nominal wage rigidity to a standard New Keynesian model with sticky prices and wages, where the zero lower bound on nominal interest rates is allowed to bind. We find that wage rigidity not only reduces the frequency of zero bound episodes but also mitigates the severity of corresponding recessions. -
April 2017 Annual Reassessment of Potential Output Growth in Canada
This note summarizes the Bank of Canada’s annual reassessment of potential output growth, conducted for the April 2017 Monetary Policy Report. Potential output growth is projected to increase from 1.3 per cent in 2017 to 1.6 per cent by 2020. -
Anticipated Technology Shocks: A Re‐Evaluation Using Cointegrated Technologies
Two approaches have been taken in the literature to evaluate the relative importance of news shocks as a source of business cycle volatility. The first is an empirical approach that performs a structural vector autoregression to assess the relative importance of news shocks, while the second is a structural-model-based approach. -
Assessing the Business Outlook Survey Indicator Using Real-Time Data
Every quarter, the Bank of Canada conducts quarterly consultations with businesses across Canada, referred to as the Business Outlook Survey (BOS). A principal-component analysis conducted by Pichette and Rennison (2011) led to the development of the BOS indicator, which summarizes survey results and is used by the Bank as a gauge of overall business sentiment. -
Optimal Capital Regulation
We study constrained-efficient bank capital regulation in a model with market-imposed equity requirements. Banks hold equity buffers to insure against sudden loss of access to funding. However, in the model, banks choose to only partially self-insure because equity is privately costly. -
Price-Level Dispersion versus Inflation-Rate Dispersion: Evidence from Three Countries
Inflation can affect both the dispersion of commodity-specific price levels across locations (relative price variability, RPV) and the dispersion of inflation rates (relative inflation variability, RIV). Some menu-cost models and models of consumer search suggest that the RIV-inflation relationship could differ from the RPV-inflation relationship. -
A Dynamic Factor Model for Nowcasting Canadian GDP Growth
This paper estimates a dynamic factor model (DFM) for nowcasting Canadian gross domestic product. The model is estimated with a mix of soft and hard indicators, and it features a high share of international data. -
Terms-of-Trade and House Price Fluctuations: A Cross-Country Study
Terms-of-trade shocks are known to be key drivers of business cycles in open economies. This paper argues that terms-of-trade shocks were also important for house price fluctuations in a panel of developed countries over the 1994–2015 period. -
Firm-Specific Shocks and Aggregate Fluctuations
In order to understand what drives aggregate fluctuations, many macroeconomic models point to aggregate shocks and discount the contribution of firm-specific shocks. Recent research from other developed countries, however, has found that aggregate fluctuations are in part driven by idiosyncratic shocks to large firms. -
Monetary Policy Tradeoffs Between Financial Stability and Price Stability
We analyze the impact of interest rate policy on financial stability in an environment where banks can experience runs on their short-term liabilities, forcing them to sell assets at fire-sale prices.