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Research Priorities at Bank of Canada: Opportunities for Collaboration Lawrence Schembri International Department Bank of Canada December 2006 The MIT Central Bank Research Network 2006 Fall Conference These are the views of the author, not the Bank of Canada Background • Research Themes/Questions are on Bank of Canada website (updated annually) • Objectives: 1. Establish research priorities (via a consultation process with management and staff) 2. Internal communication: Guide research staff 3. External communication: Inform the public and other researchers Bank of Canada Research Themes • The monetary policy framework • Global developments (& their impact on Canada) • Productivity, labour supply, and potential output • Financial system (stability & efficiency) • Analytical tools (chiefly, modeling) • Other: Payments & settlements systems / Currency / Operations The Monetary Policy Framework: Key Questions 1. Inflation control target renewal (currently 1%-3%) • Should the target inflation rate be lowered? • Should a price level target be adopted? • • • Helps avoid the zero-lower bound problem Reap the potential welfare gains from historydependent policy (no unit root in price level) Practical issues: • • • Communications strategy Monetary policy of trading partners Secular changes in commodity prices or the prices of manufactured goods The Conduct of Monetary Policy: Key Questions (continued) 2. Transparency (and communications) • • What are the benefits of increased transparency? • Enhanced credibility, better inflation performance and improved inflation/output variability trade-off • Lower interest rate risk premia How best to increase transparency? • Publish paths for the policy interest rate and exchange rate 3. Monetary policy under uncertainty Global Developments: Key Questions 1. Global imbalances • What are the underlying causes? • How will they be resolved? (USD depreciation) • What policies should be adopted to reduce the risk of a sharp (disorderly) adjustment? 2. Globalization and inflation • What is the impact of Asian growth on domestic inflation (core versus headline)? 3. Internal adjustment to relative price movements Productivity, Labour Supply, and Potential Output: Key Questions • What are the current trend growth rates of labour productivity, labour supply, and potential output in Canada and its major trading partners and how are these growth rates likely to evolve? • Demographic factors, size of labour force, and participation rates • Migration Financial System: Key Questions • What framework can be used to identify and quantify domestic and global macro risks to the Canadian financial system and assess vulnerabilities? • Goal: A more rigorous framework • Need: Models of domestic financial system • What factors are inhibiting the efficiency of the Canadian financial system? • How best to reform the IMF to promote a stable and efficient market-based international monetary system? • Quota / Surveillance / Lending Analytical Tools: Key Issues • Canadian Projection Model – Terms of Trade Economic Model (ToTEM) • Estimation of DSGE model • Global Economic Model (GEM) Canadian Version • • • 5 regions / energy and non-energy commodity prices Simulation exercises: global imbalances, commodity prices Feasibility study: Implementation using real-time data • Use of micro-financial data on households and firms Theme 1: Improving the Monetary Policy Framework • Question 1: What are the implications of Canada adopting a lower target rate for inflation or a price-level target in an integrated global economy? • Question 2: From the experience of other countries, what factors [e.g., the extent of transparency in communications, the use of models] can be identified to have improved the performance of monetary policy? Theme 2: Analysing Major Global Economic Developments and Their Impact on Canada • Question 1: How can large current account deficits and surpluses among major countries be resolved, or at least, managed? In particular, what policies could be adopted by governments [e.g., regarding U.S. fiscal policy and Chinese exchange rate policy] to ensure an orderly adjustment (or reduce the risk of a disorderly one)? • Question 2: What factors influence movements in the Canadian dollar and how should monetary policy react to them? What factors influence the choice of an exchange rate regime? Theme 2: Analysing Major Global Economic Developments and Their Impact on Canada • Question 3: What is the impact of the integration of East Asia and other emerging markets on the world prices of commodities and manufactured goods, and on global inflation? • Question 4: What are the prospects for and determinants of output growth in the major economies over the medium to long term? In particular, what are the effects of differential rates of demographic and productivity growth? What lessons can be learned for Canada from these international comparisons? Theme 4: Financial System Stability • Question 1: What measures can the IMF adopt to promote a well-functioning market-based international financial system? • Question 2: How can global risks to the Canadian financial sector be identified and their impact assessed?