Unstable Velocity, Volatile Exchange Rates, And Currency Substitution: The Demand For Money In A Multicurrency World

The thesis examines the problem of recent instability in the demand for money functions of the major OECD economies. Several clues in the literature lead to consideration of currency substitution, the presumption being that recent increases in the latter have resulted in unexpected exhange rate volatility as well as shifts in the world demand for money equations. The Thesis investigates the microeconomic foundations of the demand for money in a world where transactions occur in more than one currency, and where portfolios include foreign currency deposits. Three distinct but complementary theories are developed, each based on one of the three Keynesian motives for holding money: the transactions, precautionary and speculative motives. A variety of testable, discriminating hypotheses are derived.;The Thesis tests the predictions for both narrow and broad definitions of the money stock, for two alternative adjustment specifications of the demand for money, using data for Canada, the United States, and Germany. While the results for the popular \u27partial-adjustment\u27 model are largely negative, those for a \u27polynominal distributed lag\u27 model are supportive of the hypotheses derived in the theoretical chapters. In particular, expected rates of depreciation, foreign interest rates and foreign income are jointly statistically significant at the 0.95 level, indicating that a significant proportion of the variation in the demand for real cash balances may be explained by \u27currency substitution\u27.;Subsequently, the reliability of the demand for money specifications which take account of foreign influences is compared with that of traditional, \u27one-money\u27 equations, by conducting ex-post forecasting experiments. It is found that the traditional specification performs best for Canada, while the expanded specification, which incorporates the hypotheses of this Thesis, achieves a lower root-mean-squared forecast error for both Germany and the United States

Integrating uncertainty and monetary policy-making: A practitioner's perspective

This paper discusses how central banking is evolving in light of recent experience, with particular emphasis on the incorporation of uncertainty into policy decision-making. The sort of post-crisis uncertainty that central banks are dealing with today is more profound than that which is typically subjected to rigorous analysis and does not lend itself easily to formal modelling. As a practical matter, the policy-maker is dependent on macro models to develop a coherent monetary policy plan, and this burden of coherence means that fundamental uncertainty must be incorporated explicitly into the policy formulation process. As suggested here, doing so transforms policy formulation from an exercise in reverse engineering to one of risk management, one consequence of which is to inject a little more realism about uncertainty into the policy narrative, while trusting markets to wrestle with the data flow and deliver two-way trading. The evolution is likely to be a long one - researchers are encouraged to keep focusing on developing a practical understanding of how the economy works, one that admits that rules around economic behaviour are not cast in stone, but are almost certainly subject to variation through time and events.Le présent article examine l’évolution que connaissent les banques centrales à la lumière de l’expérience récente et met l’accent sur l’intégration de l’incertitude dans le processus d’élaboration de la politique monétaire. L’incertitude à laquelle les banques centrales sont confrontées dans un contexte d’après-crise est plus profonde que celle faisant généralement l’objet d’analyses rigoureuses et ne se prête pas aussi facilement à la modélisation formelle. Dans la pratique, le décideur dépend des modèles macroéconomiques pour la mise au point d’un plan cohérent en matière de politique monétaire, et en raison de cette exigence de cohérence, l’incertitude fondamentale doit être explicitement prise en compte dans l’élaboration de cette politique. Ce faisant, la formulation de la politique ne repose plus sur un modèle purement technique, mais plutôt sur un processus de gestion des risques. C’est donc dire qu’il faut tenir compte de l’incertitude de façon un peu plus réaliste dans le message de la Banque, tout en se fiant aux marchés pour jongler avec les flux de données et s’ajuster dans les deux sens. L’évolution sera sûrement longue. On encourage les chercheurs à poursuivre leurs efforts pour en arriver à une compréhension pratique des rouages de l’économie, et ainsi reconnaître que les règles entourant les comportements économiques ne sont pas immuables, mais varient presque inévitablement au fil du temps ou des événements

The Bank of Canada's new Quarterly Projection Model (QPM): An introduction

This article provides an overview of the Bank of Canada's new economic model, the Quarterly Projection Model (QPM), which has been under development at the Bank since 1989. The model has two roles. It is used to make economic projections, which are conducted quarterly and form an important basis for discussions of monetary policy between staff and senior management. QPM is also a research tool: it was developed to analyse important changes to the economy or macroeconomic policies which require a deeper understanding of long-term economic forces. The model pays particular attention to factors shaping long-term equilibrium, such as stocks of wealth, capital, government debt and net foreign assets. Various sources of dynamics, including the adjustment of forward-looking expectations, operate to determine the transition path to equilibrium and the consistency of expectations. The article discusses the history of QPM and earlier economic models at the Bank, and provides a simple overview of how the model works.

How will Canada prosper in the next age of uncertainty?

Dr. Poloz is a distinguished economist with four decades of experience in financial markets, forecasting, and economic policy. He is the author of The Next Age of Uncertainty: How the World Can Adapt to a Riskier Future (2022). Dr. Poloz was the ninth Governor of the Bank of Canada until June 2020. Prior to that appointment, he served as Chief Executive Officer at Export Development Canada. He has been a visiting scholar at the International Monetary Fund and at the Economic Planning Agency in Tokyo, Japan, and past president of the Ottawa Economics Association. In 2017, he was awarded an Honorary Doctor of Laws degree from Trent University. Dr. Poloz is a Certified International Trade Professional, and a graduate of Columbia University’s Senior Executive Program.Non UBCUnreviewedOthe

Changing fortunes: Long-termism - G-Zero, artificial intelligence and debt

This paper looks at the implications for monetary policy of the widespread adoption of artificial intelligence and machine learning, which is sometimes called the "fourth industrial revolution". The paper reviews experiences from the previous three industrial revolutions, developing a template of shared characteristics: new technology displaces workers; investor hype linked to the new technology leads to financial excesses; new types of jobs are created; productivity and potential output rise; prices and inflation fall; and real debt burdens increase, which can provoke crises when asset prices crash. The experience of the Federal Reserve during 1995-2006 is particularly instructive. The paper uses the Bank of Canada's main structural model, ToTEM (Terms-of-Trade Economic Model), to replicate that experience and consider options for monetary policy. Under a Taylor rule, monetary policy may allow growth to run as long as inflation remains subdued, easing the burden of adjustment on those workers directly affected by the new technology, while macroprudential policies help check financial excesses. This argues for a family of Taylor rules enhanced by the addition of financial stability considerations