D5 - General Equilibrium and Disequilibrium
-
A Macroprudential Theory of Foreign Reserve Accumulation
This paper proposes a theory of foreign reserves as macroprudential policy. We study an open-economy model of financial crises in which pecuniary externalities lead to overborrowing, and show that by accumulating international reserves, the government can achieve the constrained-efficient allocation. -
The Impact of Government Debt Supply on Bond Market Liquidity: An Empirical Analysis of the Canadian Market
This paper finds that Government of Canada benchmark bonds tend to be more illiquid over the subsequent month when there is a large increase in government debt supply. The result is both statistically and economically significant, stronger for the long-term than the short-term sector, and is robust when other macro factors are controlled for. -
May 16, 2016
Estimating Canada’s Effective Lower Bound
Recently, the Bank of Canada has estimated the effective lower bound (ELB) on its policy interest rate to be about -50 basis points. This article outlines the analysis that underpins that estimate by quantifying the costs of storing and using cash in Canada. It also explores how some international markets have adapted to negative interest rates, issues surrounding their implementation, as well as their transmission to other interest rates in the economy. Finally, it discusses theoretical ideas on how the ELB could be reduced further. -
Estimating Canada’s Effective Lower Bound
In 2009, the Bank of Canada set its effective lower bound (ELB) at 25 basis points (bps). Given the recent experience of Sweden, Denmark, Switzerland and the euro area with negative interest rates, we examine the economics of negative interest rates and suggest that cash storage costs are the source of a negative lower bound on interest rates. -
Financial Crisis Resolution
This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are not constrained efficient when the economy experiences a financial crisis. A pecuniary externality entails that banks’ desire to accumulate capital over time aggravates the scarcity of informed capital during the financial crisis. -
Do Low Interest Rates Sow the Seeds of Financial Crises?
A 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. -
Real-Financial Linkages in the Canadian Economy: An Input-Output Approach
The purpose of this paper is twofold. First, we provide a detailed social accounting matrix (SAM), which incorporates the income and financial flows into the standard input-output matrix, for the Canadian economy for 2004. -
Inflation, Nominal Portfolios, and Wealth Redistribution in Canada
There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. -
On Portfolio Separation Theorems with Heterogeneous Beliefs and Attitudes towards Risk
The early work of Tobin (1958) showed that portfolio allocation decisions can be reduced to a two stage process: first decide the relative allocation of assets across the risky assets, and second decide how to divide total wealth between the risky assets and the safe asset. This so called twofund separation relies on special assumptions on either returns or preferences. -
Implications of Asymmetry Risk for Portfolio Analysis and Asset Pricing
Asymmetric shocks are common in markets; securities' payoffs are not normally distributed and exhibit skewness. This paper studies the portfolio holdings of heterogeneous agents with preferences over mean, variance and skewness, and derives equilibrium prices.