Showing papers by "Government of Canada published in 2010"

Effects of Fiscal Stimulus in Structural Models

Abstract: The paper assesses, using seven structural models used heavily by policymaking institutions, the effectiveness of temporary fiscal stimulus. Models can, more easily than empirical studies, account for differences between fiscal instruments, for differences between structural characteristics of the economy, and for monetary-fiscal policy interactions. Findings are: (i) There is substantial agreement across models on the sizes of fiscal multipliers. (ii) The sizes of spending and targeted transfers multipliers are large. (iii) Fiscal policy is most effective if it has some persistence and if monetary policy accommodates it. (iv) The perception of permanent fiscal stimulus leads to significantly lower initial multipliers.

Macroprudential Capital Requirements and Systemic Risk

Abstract: When regulating banks based on their contribution to the overall risk of the banking system we have to consider that the risk of the banking system as well as each bank's risk contribution changes once bank equity capital gets reallocated. We define macroprudential capital requirements as the fixed point at which each bank's capital requirement equals its contribution to the risk of the system under the proposed capital requirements. This study uses two alternative models, a network based framework and a Merton model, to measure systemic risk and how it changes with bank capital and allocates risk to individual banks based on five risk allocation mechanisms used in the literature. Using a sample of Canadian banks we find that macroprudential capital allocations can differ by as much as 70% from observed capital levels, are not trivially related to bank size or individual bank default probability, increase in interbank assets, and differ substantially from a simple risk attribution analysis. We further find that across both models and all risk allocation mechanisms that macroprudential capital requirements reduce the default probabilities of individual banks as well as the probability of a systemic crisis by about 25%. Macroprudential capital requirements are robust to model risk and are positively correlated to future capital raised by banks as well as future losses in equity value. Our results suggest that financial stability can be substantially enhanced by implementing a systemic perspective on bank regulation.

Bank Profitability During Recessions

Abstract: This paper estimates the relation between bank profitability and economic downturns using a theoretical model that takes into account the bank’s lending history as well as amortization and losses on outstanding loans. We focus on total bank profits and its components: net interest income, other income, and net provisioning plus other costs. Using both aggregate and individual bank panel datasets, our results confirm that pro-cyclicality of bank profits is stronger for deep recessions than during mild ones. Loan-losses are found to be the main driver of this nonlinearity. We find evidence that each percent contraction of real GDP during severe recessions leads to a 0.24 percent decrease in return on bank assets.

Estimating Potential Output with a Multivariate Filter

Abstract: This paper develops a simple model for measuring potential output that uses data on inflation, unemployment, and capacity utilization. We apply the model to 10 countries, in addition to the United States and the euro area. While there is a substantial amount of uncertainty around our estimates, we find that the financial crisis has resulted in a reduction in potential output.

The Safety of Cash and Debit Cards: A Study on the Perception and Behaviour of Dutch Consumers

Abstract: This paper investigates the impact of consumers’ safety perception on debit card and cash usage. A conceptual framework of safety perception and payment behaviour is introduced and tested with 2008 consumer survey data. The results demonstrate that consumers’ payment preferences for cash and debit cards are strongly affected by how consumers assess the likelihood and seriousness of safety incidents related to cash, debit cards and ATM withdrawals. Risk aversion, personal characteristics and personal experiences all play a significant role. This study underlines the importance of effective safety measures, which minimise the risks inherent in the payment system, and of clear communication towards consumers, so that they may continue to pay efficiently and safely in all circumstances.

Determinants of Financial Stress and Recovery During the Great Recession

Abstract: In this paper, we explore the link between stress in the domestic financial sector and the capital flight faced by countries in the 2008-9 global crisis. Both the timing of emergence of internal financial stress in developing economies, and the size of the peak-trough declines in the stock price indices was comparable to that in high income countries, indicating that there was no decoupling, even before Lehman Brothers' demise. Deleveraging of OECD positions seemed to dominate the patterns of capital flows during the crisis. While high income countries on average saw net capital inflows and net portfolio inflows during the crisis quarters, compared to net outflows for developing economies, the indicators of banking sector stress were higher for high income economies on average than for developing economies. Internal and external distress during crisis was closely interlinked with common underlying causes of both the severity of stress during the crisis and the recovery. External vulnerabilities were important in both phases, and higher international reserves did not insulate countries from stress.

Important Elements for Inflation Targeting for Emerging Economies

Abstract: This is the fifth chapter of a forthcoming monograph entitled "On Implementing Full-Fledged Inflation-Targeting Regimes: Saying What You Do and Doing What You Say." It examines whether certain conditions have to be met before emerging economies can adopt an inflation-targeting regime and provides some empirical evidence on the matter. The issues analyzed are the priority of inflation targeting over other goals, the absence of fiscal dominance, central bank independence, the degree of control over the policy interest rate, a sound methodology for forecasting, and the soundness of financial institutions and markets, and resilience to changes in exchange rates and interest rates.

Estimates of Human Capital in Canada: The Lifetime Income Approach

Abstract: This paper produces an estimate of market-based human capital investment and stock for Canada over the period from 1970 to 2007 based on the lifetime income approach and compares it with that of physical and natural capital investment and stock. It adopts the methodology developed by Jorgenson and Fraumeni, and estimates human capital stock as the expected future lifetime income of all individuals. Human capital investment is estimated as changes in human capital stock due to the addition of new members of the working age population arising from the rearing and education of children and the effect of immigration on human capital.The main findings are as follows: 1. The volume of aggregate human capital rose at an annual rate of 1.7% in Canada for the period 1970 to 2007, and most of the growth is due to the increase in the number of individuals in the working-age population. The rising education level of the Canadian population is also a significant contributing factor to the growth in human capital. 2. The compositional effects of aging of the Canadian population (a movement to a population that is older on average) reduced human capital growth by 0.6% per year over the period 1980 to 2007, while the rising education level increased human capital growth by 0.7% per year over the period. 3. Human capital stock on a per capita basis increased at 0.9% per year for the period 1970 to 1980, due to the rising education attainment during the period. After 1980, human capital stock per capita was virtually unchanged due to two offsetting factors: rising education level which increased human capital stock and the compositional effects of population aging, which reduced human capital stock. 4. The value of human capital investment and stock exceeds the value of physical capital investment and stock, and the ratio of human capital investment and stock to physical capital investment and stock declined over time. In 2007, human capital stock is about four times as large as physical capital stock while investment in human capital is about two times the magnitude of investment in physical capital. 5. The levels of human capital investment and stock estimates are sensitive to the assumptions made about expected future income growth and the rate used to discount the future income when calculating human capital, but the growth of the quantity and price of human capital investment and stock is not sensitive to the assumptions in these areas

Mapping an unfriendly subway system

Abstract: We consider a class of highly dynamic networks modelled on an urban subway system. We examine the problem of creating a map of such a subway in less than ideal conditions, where the local residents are not enthusiastic about the process and there is a limited ability to communicate amongst the mappers. More precisely, we study the problem of a team of asynchronous computational entities (the mapping agents) determining the location of black holes in a highly dynamic graph, whose edges are defined by the asynchronous movements of mobile entities (the subway carriers). We present and analyze a solution protocol. The algorithm solves the problem with the minimum number of agents possible. We also establish lower bounds on the number of carrier moves in the worst case, showing that our protocol is also move-optimal.

Drought Tolerance Thresholds in Cattail (Typha latifolia): A Test Using Controlled Hydrologic Treatments

Abstract: Decades of anthropogenic flooding to create wetlands in spring for breeding waterfowl in the Canadian Prairies have produced undesirable successional shifts from open wetlands dominated by endemic Eleocharis palustris L. (spikerush), to habitats dominated by relatively closed communities of Typha latifolia L. (cattail). Using 2 greenhouse experiments, we examined the potential of specific drying regimes to cross moisture thresholds and achieve T. latifolia control while maintaining E. palustris. We assessed the morphologic (leaf density, shoot ratio, biomass) and biochemical (root carbohydrate) responses of transplanted T. latifolia and E. palustris to different soil hydrologic treatments, including continuous flooding (CF), field capacity (FC) moisture, and 5 different drying stress (DS) treatments ranging from 4 to 12 weeks in duration, including recovery during re-inundation. Our results suggest that both plant species are susceptible to low soil moisture, as exemplified by reduced growth and survival. Although T. latifolia recovery during reflooding declined with incremental severity of moisture stress, T. latifolia was more tolerant to drought than E. palustris, with soil moisture below 5% required to induce complete root mortality. We conclude that only very low soil moisture will achieve T. latifolia control, under which E. palustris will have to re-establish from seed.

The Efficacy of Collaborative Learning Recitation Sessions on Student Outcomes

Abstract: We investigate the efficacy of Collaborative Learning Recitation Sessions on Students Outcome. A quasi-randomized experiment is conducted on two large introductory microeconomics class sections at Indiana University’s Bloomington-Indiana campus in the Fall 2009 semester. Program evaluation methods are used to compute the treatment effect of students participating in Collaborative Learning. We find an average treatment effect in the range of 4.6 to 4.9 percent on the raw final grade. This translates to a grade change i.e., B to B plus.

Budget Consolidation: Short-Term Pain and Long-Term Gain

Abstract: The paper evaluates the costs and benefits of fiscal consolidation using simulations based on the IMFs global DSGE model GIMF. Over the longer run, well-targeted permanent reductions in budget deficits lead to a considerable increase in both the growth rate and the level of output. The gains may be enhanced by shifting some of the tax burden from incomes to consumption. In the short run, credibility plays a crucial role in determining the size of initial output loses. Global current account imbalances would be significantly reduced if budget consolidation was larger in countries with current account deficits.

Does it Matter What You Measure? Neighbourhood Effects in a Canadian Setting

Abstract: Data from 8,032 Manitoba respondents to the 1996/97 Canadian National Population Health Survey were linked to the 1996 census to study whether measures of morbidity, both self-reported and objectively determined, were affected by neighbourhood context. Once age, gender, smoking status, diabetes, body mass index and individual income were added to individual and multi-level regression models, effects of various neighbourhood characteristics were attenuated and significant in relatively few cases. Caution is definitely called for in generalizing from studies based on one or two dependent variables. Weak relationships are likely to lead to contradictory findings with respect to the importance of neighbourhood effects.

A Model for Full-Fledged Inflation Targeting and Application to Ghana

Abstract: A model in which monetary policy pursues full-fledged inflation targeting adapts well to Ghana. Model features include: endogenous policy credibility; non-linearities in the inflation process; and a policy loss function that aims to minimize the variability of output and the interest rate, as well as deviations of inflation from the long-term low-inflation target. The optimal approach from initial high inflation to the ultimate target is gradual; and transitional inflation-reduction objectives are flexible. Over time, as policy earns credibility, expectations of inflation converge towards the long-run target, the output-inflation variability tradeoff improves, and optimal policy responses to shocks moderate.

Structural Models in Real Time

Abstract: This paper outlines a simple approach for incorporating extraneous predictions into structural models. The method allows the forecaster to combine predictions derived from any source in a way that is consistent with the underlying structure of the model. The method is flexible enough that predictions can be up-weighted or down-weighted on a case-by-case basis. We illustrate the approach using a small quarterly structural and real-time data for the United States.

Integrated Productivity Accounts: Contributions to the Measurement of Capital

Abstract: Measures of productivity are derived by comparing outputs and inputs. The System of National Accounts (SNA) in Canada provides a useful framework for organizing the information required for comparisons of this type. Integrated systems of economic accounts provide coherent, consistent alternate estimates of the various concepts that can be used to measure productivity.

Transient analysis of electromagnetic wave reflection from a stratified medium

Abstract: During recent years, we have been developing an efficient time domain technique based on numerical inversion of Laplace transform (NILT), for modelling pulse reflection from a lossy or dispersive dielectric half space and pulse propagation in a dispersive medium. In this paper, this technique is extended and applied to transient analysis of electromagnetic pulses reflected from a layered medium, with a simple algorithm, low computation cost, good accuracy and physical interpretation. The correctness and effectiveness of this work are confirmed by comparing our results with those published in the literature.

Inward fdi and productivity performance in canadian industries: does the country of origin matter?

Abstract: This paper investigates whether the productivity impact of inward FDI in Canada differs by country of origin. Using panel data on Canadian industries, we find that only FDI originating from the U.S...

Fixed-Term and Permanent Employment Contracts: Theory and Evidence

Abstract: This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixed-term contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firms' hiring and firing rules. Using matched employer-employee data from Canada, we estimate the wage equations from the model. The effects of firing costs on wage inequality vary dramatically depending on whether search externalities are taken into account.

Financial Integration and Growth - Is Emerging Europe Different?

Abstract: Using industry-level data, this paper shows that the European transition region benefited much more strongly from financial integration in terms of economic growth than other developing countries in the years preceding the current crisis. We analyze several factors that may explain this finding: financial development, institutional quality, trade integration, political integration, and financial integration itself. The explanation that stands out is political integration. Within the group of transition countries, the effect of financial integration is strongest for countries that are politically closest to the EU. This suggests that political and financial integration are complementary and that political integration can considerably increase the benefits of financial integration.

Econometric Issues in Hedonic Price Indices: The Case of Internet Service Providers

Abstract: Researchers in hedonic studies frequently encounter the problems of the choice of functional forms, the use of pooled regression using time dummies versus period to period regression, and the unit of measurement of the product. This paper examines these issues through the study of Internet service providers in Canada from 1993 to 2000. A series of tests are employed to evaluate the best procedure. We find that the commonly used log-linear equation with period to period regression and hourly rate charged gives a robust result compared with the more flexible translog function. The quality-adjusted price index declines at about 15 percent per year.

Fiscal Fragility: What the Past May Say About the Future

Abstract: The end of the great moderation has profound implications on the assessment of fiscal sustainability. The pertinent issue goes beyond the obvious increase in the stock of public debt/GDP induced by the global recession, to include the neglected perspective that the vulnerabilities associated with a given public debt/GDP increase with the future volatility of key economic variables. We evaluate for a given future projected public debt/GDP, the possible distribution of the fiscal burden or the flow cost of funding debt for each OECD country, assuming that this in future decades resembles that in the past four decades. Fiscal projections may be alarmist if one jumps from the priors of great moderation to the prior of permanent high future burden. Prudent adjustment for countries exposed to heightened vulnerability may entail both short term stabilization and forward looking fiscal reforms.

Connecting Rural Canadians: A Review of Policy, Measurement and Outcomes

Abstract: The rate of Internet diffusion in Canada has been quite rapid compared to other innovations such as electricity and telephony. Internet diffusion however, has not been homogenous and depends on many factors. Previous research has identified unevenness both geographically and among different segments of the population.A logistic regression model of 2005 Canadian Internet Use Survey (CIUS) data found that an individual residing in a rural or small town location had lower odds of Internet use, controlling for other factors such as age, income and education. And these lower odds of use in smaller communities were the same irrespective of proximity to larger urban centres, implying a hierarchical diffusion pattern. This same regression model was then applied to the 2007 CIUS data in order to determine how the factors associated with Internet use had changed. While the difference in odds of Internet use between urban and rural residents remained statistically significant, it had become smaller.This paper examines the changing importance of factors associated with accessing the Internet since 2005, with an emphasis on geographic location and broadband penetration. The first section will review public policy initiatives of the Canadian government and measurement efforts by Statistics Canada. The next section examines previous research illustrating urban and rural differences in online access and uses. Bolstering rural Internet use by providing on-ramps to the so called information highway was the policy objective of the federal Community Access Program. As the emphasis has shifted to increasing broadband connectivity, closing the rural digital divide remained a policy objective of the federal Connecting Rural Canadians program. The final section presents results from the 2009 CIUS to illustrate how the survey can inform federal broadband policy and then describes how the CIUS was redesigned to provide better measures of household Internet connectivity.