Bank Of Canada Research Articles

Central banks’ knowledge controversies

ABSTRACT In the last few years, the Federal Reserve, the European Central Bank and the Bank of Canada have all initiated policy reviews to reassess monetary policy tools and ideas that were no longer working in a changing global economy. In this paper, I argue that the debates that shaped these reviews can best be understood as ‘knowledge controversies’ in which some of the foundational metrics that monetary policies rely on themselves became the subject of debate. This unsettling of existing economic metrics poses not just technical but also political problems for central banks. These debates have eroded their efforts to depoliticise key issues, revealing the fragility of their technical fixes as metrics themselves can become the source of political disagreement both within the central banks themselves and in the wider public. As we enter an era of even more intense inflation-driven debates about central banking expertise and authority, these reviews provide insights into the epistemic dilemmas that central banks confront, suggesting that they will be dealing with knowledge controversies for some time to come.

Canadian Bank Capital and Liquidity Creation*

AbstractWe find a significantly positive relationship between the Tier 1 capital ratio and on‐balance‐sheet liquidity creation for Canadian Big Six banks, implying that large banks in Canada can take risk due to risk absorption by using capital to fund illiquid assets. Our results are robust to the 2018 initiation of a domestic stability buffer (DSB) of total risk‐weighted assets for Pillar 2 risks, core deposits financing, non‐deposit funding restrictions, and bank mergers and acquisitions. The positive relation (regulatory capital ratio with liquidity creation) becomes significantly negative during the 2007–9 Global Financial Crisis and COVID‐19 pandemic.

Explaining bitcoin ownership in Canada: Trends from 2016 to 2021

AbstractThis paper studies the dynamics of bitcoin ownership from 2016 to 2021, using the Bank of Canada's Bitcoin Omnibus Surveys. The estimated rate of bitcoin ownership jumped to 13% in 2021, up from the 5% observed in the previous three years. On one hand, this increase reflected broader economic trends related to increased savings and investment of Canadians during the COVID‐19 pandemic, along with financial technology companies providing accessible and user‐friendly platforms for buying bitcoin. Looking deeper, we use econometric models to quantify several specific ways in which bitcoin became more mainstream as an investment in 2021. Finally, we investigate the high cash holdings of bitcoin owners across time.

International spillovers of conventional versus new monetary policy

We use a calibrated open-economy New Keynesian model to compare the spillovers from conventional and new monetary policy shocks from the US to Canada. We find that shocks with similar effects on the US GDP affect Canada’s private bond yield differently. For example, a forward guidance shock increases Canada’s private bond yield by 0.15%, however a quantitative easing (QE) shock decreases it by 0.13%. Our counterfactual policy simulations for the 2008 crisis show that (1) a more aggressive QE by the Fed would have resulted in a milder recession in the US but a steeper one in Canada. (2) If the Bank of Canada had followed the Fed’s QE policies, the drop in Canada’s GDP would have been much smaller. (3) Finally, if the Fed had implemented a mild negative interest rate policy, the effects on the Canadian economy would be similar to those of the benchmark zero-rate policy.

The digital divide: psychographic segmentation in the Canadian banking context

The digital divide: psychographic segmentation in the Canadian banking context

Bidder-Specific Synergies and the Evolution of Acquirer Returns

Largely constant average acquirer returns over the past four decades mask fundamental changes in the takeover market. Controlling for bidder composition, the common component of acquirer returns has increased by five percentage points relative to the 1980s. Offsetting this increase, the average bidder-specific component has declined. We propose a theory of bidder-specific synergies to help interpret these opposing trends. In our theory and in the data, acquirer returns increase with the extent to which synergies are unique to that bidder. The composition effect reflects bidder uniqueness. Overall, the evidence is consistent with rising merger synergies that have become less bidder specific. This paper was accepted by Victoria Ivashina, finance. Funding: A. Golubov acknowledges financial support from the Bank of Canada [Governor’s Award]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.02208 .

Do central banks respond to house price movements? A Bayesian DSGE approach

AbstractThis thesis explores whether monetary policy reacts to house price movements, by employing a New Keynesian model with a housing factor and estimated using Bayesian estimation techniques. The primary emphasis of this study is on the United States, with supplementary analyses on central banks in several advanced economies. The principal finding of this thesis reveals that the Federal Reserve responded substantially but episodically to house prices. Furthermore, my investigation indicates that the Reserve Bank of Australia, the Reserve Bank of New Zealand, Bank of England, and the European Central Bank did not incorporate house prices into their policy framework, whereas the Bank of Canada did so episodically. The baseline results remain robust across a range of sensitivity checks.

Pricing Indefinitely Lived Assets: Experimental Evidence

We study indefinitely lived assets in experimental markets and find that the traded prices of these assets are on average about 40% of the risk-neutral fundamental value. Neither uncertainty about the value of total dividend payments nor horizon uncertainty about the duration of trade can account for this low traded price. An Epstein-Zin recursive preference specification that models the dynamic realization of dividend payments, combined with either probability weighting or subjects’ heterogeneous risk attitudes, can rationalize the low traded prices observed in our indefinitely lived asset market. This paper was accepted by Yan Chen, behavioral economics and decision analysis. Funding: This work was supported by Concordia University and the Bank of Canada. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.03059 .

A Framework for Security Assessment of Android Mobile Banking Applications

Mobile banking applications make users' daily lives easier by allowing them to access banking services, such as balance inquiries and bill payments, anytime and anywhere. Since these applications manage very sensitive financial data, special attention must be paid to data security. Several works in the literature assess the security of mobile banking applications. However, we observe the lack of a widely adopted framework among researchers for assessing the security of mobile banking applications. In this paper, we propose a framework consisting of twenty-six criteria for assessing the security of Android mobile banking applications. These criteria are divided into five categories: mobile device security, data in transit, data storage, cryptographic misuse, and others. Subsequently, we evaluate the proposed framework based on predefined requirements. These requirements are no redundancy, no ambiguity, and comprehensiveness. As a case study, we assess the security of the Android mobile banking applications of seven major Canadian banks. The results show that data in transit is adequately protected by these applications.

Oil Price Volatility and Option Implied Risk Connectedness in the Canadian Banking Sector

Oil Price Volatility and Option Implied Risk Connectedness in the Canadian Banking Sector

Investing in green bonds and its impact on stock prices and profitability for banks A study of his analysis of a sample of Canadian banks, Royal Bank, as a model For the period (2005-2022)

Investing in clean energy projects requires non-traditional tools, including green bonds, as they provide a set of advantages that qualify the projects to obtain financing. Therefore, this study aims to demonstrate the impact of Canadian banks introducing green bonds in their list of investments and the extent of their impact on the prices and returns of their shares. In the financial market , The study relied on the most important test for normal distribution, which is the Kolmogorov-Smirnov test, and a time series for a period of (18) years, from (2005 - 2022), as the bank did not deal in green bonds for the period (2005 - 2013), that is, for a period of (9) years. Green bonds were dealt with for the period (2014-2022), The results of the study showed that there was a clear increase in the stock price and its profitability after investing in green bonds over the previous period of this investment. In order to test the significance of this increase, the statistical program (Statgraphics V.18) was used.

Loblaw Companies Limiteds Basic Financial Analysis and Calculation Display

For a company, financial analysis can help the company analyze its financing, investment, risk management, comparison with competitors and other issues to help company decision-makers make correct decisions. For the financial market, financial analysis can help investors understand the basic characteristics, current situation and future prospects of their target investment companies and help improve social and economic stability and development. This article is mainly based on a financial analysis of the current state of Loblaw Companies Limited (hereinafter referred to as Loblaw) in 2023. The research purpose of this article is to conduct an in-depth study of Loblaw by explaining the meaning and conceptual relationship of data collection, calculations and results, so that the public can have a more comprehensive understanding of the companys financial status in 2023. This paper uses literature analysis and data analysis research methods to mainly explore Loblaws risks, financing costs, current capital plans and capital structure. The data analysis models used include linear regression model, dividend discount model (DDM), capital asset pricing model (CAPM), weighted average cost of capital (WACC), net present value model (NPV). The data used for calculation comes from authoritative websites such as Yahoo Finance, Bank of Canada, and Loblaws official website. The results of the study found that Loblaw has a dominant position in the Canadian retail market. Loblaw is one company that relies more on debt financing. Its financing costs are lower than the industry average. Its capital structure has been very stable in recent years. The market has full confidence in Loblaw.

Can central bank digital currencies help advance financial inclusion?

Central banks around the world are considering how retail central bank digital currencies (CBDCs) may help to advance financial inclusion. While CBDCs are not a magic bullet, they could be a further tool to promote universal access to payments and other financial services if this goal features prominently in the design from the get-go. In particular, central banks can consider design options to: (1) promote innovation in the two-tiered financial system (eg allowing for non-bank payment service providers); (2) offer a robust and low-cost public sector technological basis (with novel interfaces and offline payments); (3) facilitate enrolment (via simplified due diligence and electronic know-your-customer processes) and data portability; and (4) foster interoperability (both domestically and across borders). Together, these features can address a range of specific barriers to financial inclusion: geographic remoteness, institutional and regulatory factors, economic and market structure issues, characteristics of vulnerability, lack of financial literacy and low trust in existing financial institutions. This paper draws on interviews with nine central banks with advanced work on CBDCs and financial inclusion — the Central Bank of the Bahamas, Bank of Canada, People’s Bank of China, Eastern Caribbean Central Bank, Bank of Ghana, Central Bank of Malaysia, Bangko Sentral ng Pilipinas, National Bank of Ukraine and Central Bank of Uruguay. It gives concrete examples from the central banks’ work and discusses challenges, risks and regulatory and legal implications. It argues that while CBDCs hold promise for furthering financial inclusion, CBDC issuance may also require new laws and regulations to be enacted, or existing laws to be revised.

Is the Bank of Canada concerned about inflation or the state of the economy?

This paper examines the behaviour of the Bank of Canada (BoC) since the adoption of the inflation-targeting framework. We use a newly released dataset that contains quarterly vintages of real-time historical data and BoC staff forecasts, and we present the following novel empirical findings. First, the BoC appears to have increased its focus towards the state of the economy. Over the sample period, we find that the response to inflation weakens and the response to the real economy rises substantially. Second, the BoC appears to be responding to an alternative inflation measure: persistent expected future inflation deviations. We find that transitory or past inflation deviations do not elicit a response. Third, the BoC appears to respond asymmetrically to positive and negative persistent expected future inflation deviations. We find an aggressive response to positive inflation deviations that declines over time in favour of a modest response to negative inflation deviations, suggesting that persistent expected future inflation overshoots and undershoots elicit different responses and these responses are time-varying.

Crypto and financial literacy of cryptoasset owners versus non-owners: The role of gender differences

AbstractWe measure crypto and financial literacy using microdata from the Bank of Canada’s Bitcoin Omnibus Survey. Our crypto literacy measure is based on three questions covering basic aspects of Bitcoin. The financial literacy measure we use is based on three questions covering basic aspects of conventional finance (the “Big Three”). We find that a significant share of Canadian Bitcoin owners have low crypto knowledge and low financial literacy. We also find gender differences in crypto literacy among Bitcoin owners, with female owners scoring lower in Bitcoin knowledge than male owners. We do not, however, find significant gender differences in financial literacy amongst Bitcoin owners. In contrast, non-owners show gender differences in both crypto and financial literacy.

The countercyclical capital buffer and international bank lending: Evidence from Canada

We examine the impact of the recently introduced Basel III countercyclical capital buffer (CCyB) on foreign lending activities of Canadian banks. By exploiting the variation in CCyB rates across countries, we overcome the identification challenge associated with limited time-series evidence on the CCyB's use in individual jurisdictions. We show that in response to a 1-percentage-point tightening announcement in a foreign CCyB, the growth rate of cross-border lending between Canadian banks and borrowers abroad decreases by 12-17 percentage points. The direction of this effect is likely driven by the CCyB's unique reciprocity rule, which also subjects foreign banks to domestic regulation.

Central bank forecasting: A survey

AbstractCentral banks' forecasts are important monetary policy inputs and tools for central bank communication. We survey the literature on forecasting at the Federal Reserve, European Central Bank, Bank of England, and Bank of Canada, focusing especially on recent developments. After describing these central banks' forecasting frameworks, we discuss the literature on central bank forecast evaluation and new tests of unbiasedness and efficiency. We also discuss evidence of central banks' informational advantage over private sector forecasters, which appears to have weakened over time, and how central bank forecasts may affect private sector expectations even in the absence of an informational advantage. We discuss how the Great Recession led central banks to evaluate their forecasting frameworks, how the Covid‐19 pandemic has further challenged central bank forecasting, and directions for future research.

Bitcoin awareness, ownership and use: 2016–20

ABSTRACT Since 2016, the Bank of Canada has conducted annual surveys to monitor awareness, adoption and usage of Bitcoin and other cryptocurrencies. This report incorporates results from the 2019 Bitcoin Omnibus Survey and the November 2020 Cash Alternative Survey. We find that between 2018 and 2020, the level of Bitcoin awareness and ownership among Canadians remained stable: nearly 90% of the population were aware of Bitcoin, while only 5% owned it. We find that about half of Bitcoin owners stated they usually obtained their bitcoins through mobile or web exchanges, while one-fifth used mining. Bitcoin owners were susceptible to certain risks, as evidenced by the fact that about half of current and past owners stated they had been affected by events such as price crashes, losing access to funds, scams or data breaches. The most commonly cited reasons for owning Bitcoin were related to its use for investment or based on interest in the technology. Bitcoin owners displayed greater knowledge about the Bitcoin network than nonowners, yet they scored lower on questions testing financial literacy.

Behavior of Banks’ Stock Market Prices during Long-Term Crises

Countries are drastically impacted by financial and fiscal crises. Financial crises have the worst impact on not only society, but also the economy. The Canadian economy underwent financial crises and recessions several times during the last century. In this paper, daily closing stock prices of five large Canadian banks were studied during the last five crisis periods. It is aimed to determine the most effective or dominant index prices on the daily closing stock price of the banks during the crisis periods. The five periods were selected from secondary data from January 1975 to December 2020 by using the graphs and the crises in the literature. Multiple linear regression was performed to analyze the impact of price indexes during crisis periods. Findings show that “price index—financials” had a positive impact on the daily closing price of banks during the last five economic crises in Canada. Since the banks have different investment tools in their portfolio, the impacts of price indexes on the daily closing prices depend on these portfolios, which ultimately could have led to the economic crises.

Forward guidance and expectation formation: A narrative approach

SummaryHow forward guidance influences expectations is not fully understood. To study this, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I describe how, when, and where forward guidance has worked. I estimate that forecasters revised their interest rate forecasts in the intended direction by five basis points on average following a forward guidance change. I provide estimates for The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand, Sveriges Riksbank, and Norges Bank.