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Canadian Policy Responses to the Global Financial Crisis and Economic Recession

Canadian Policy Responses to the Global Financial Crisis and Economic Recession. Lawrence Schembri International Department May 7 2009 For presentation at the Canada Day conference, Rimini Centre for Economic Analysis, Rimini, Italy

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Canadian Policy Responses to the Global Financial Crisis and Economic Recession

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  1. Canadian Policy Responses to the Global Financial Crisis and Economic Recession Lawrence Schembri International Department May 7 2009 For presentation at the Canada Day conference, Rimini Centre for Economic Analysis, Rimini, Italy The views expressed in this presentation reflect those of the author and not the Bank of Canada

  2. Why is the Canadian experience interesting & worthy of attention? • Canada entered the crisis in much better shape • Canada adopted the right policies at the right time. • Canada will recover faster, despite being in a not-so-good neighbourhood Bottom line: • Important lessons can be learned from Canada • The crisis will instigate useful reforms to domestic and international policy

  3. 2007: Going into the Crisis

  4. Government debt to GDP ratio was falling

  5. Taxes were declining

  6. Inflation was stable & inflation expectations were well anchored

  7. Commodity prices were rising and the loonie was strong

  8. Consumer debt levels were also rising, but not too fast

  9. House prices were rising, but not bubbling

  10. Bank leverage ratios stayed calm

  11. Crisis Chronology • Financial Crisis began: August 2007 • U.S. Recession began: December 2007 • Lehman Bros Collapse: September 2008 • Synchronized Global Recession: 2008Q4 and 2009Q1

  12. Global banks lost money

  13. Deleveraging took hold and economies contracted

  14. Canadian Policy Responses • Financial Sector • Fiscal Policy • Monetary Policy

  15. Financial Sector Policy • Liquidity provision (Bank of Canada) • Bank liability guarantees (Government of Canada) – “Lenders Assurance Facility” • Support for credit markets (Government of Canada) • NOT NEEDED - Removal of toxic assets / bank capital injections

  16. Liquidity Facilities • The Bank of Canada has introduced several new facilities to provide liquidity to capital market participants: • Swaps of high quality, but less liquid assets for short-term government bonds • Collateralised loans • Key innovations: Wider sets of participants and acceptable collateral

  17. Credit Market Support • CDN $125B Insured Mortgage Purchase Program • Additional CDN $13B for Export Development Canada, Business Development Bank of Canada, and several other Crown corporations to facilitate trade and business credit • CDN $12B Canadian Secured Credit Facility, to support vehicle leasing through purchases of Asset Backed Securities

  18. Canadian Fiscal Stimulus • Approximately CDN $40B or 2.5% of GDP • 60% will be infrastructure spending • 55% will be spend in 2009 and 2010 • CDN $8.0B in permanent personal and corporate tax cuts • Leverage infrastructure/community spending with the provinces to reach CDN $50B

  19. Monetary Policy Actions • Aggressive interest rate cuts: 425 basis points in 16 months to a target overnight rate of 0.25% • Unconventional policy measures • Conditional statement: hold rates at this level until 2010Q2 conditional on inflation outlook • Term Purchase and Resale Agreements (6-12 months in duration) • Framework for credit and quantitative easing

  20. Aside: Credit and Quantitative Easing • Quantitative easing -- outright purchase of government or private sector assets with central bank reserves • Credit easing -- outright purchase of private sector assets with the sale of other central bank assets (sterilized purchases) or in conjunction with quantitative easing and the creation of central bank reserves (unsterilized purchases)

  21. Annex on “Framework for Conducting Monetary Policy at Low Interest Rates” Figure 1: Financing and Type of Asset Purchases

  22. Outlook

  23. Quarterly Canadian GDP Growth Forecast %

  24. U.S. demand composition should be more favourable to Canadian exports Annualized Quarterly Growth %

  25. Projection for Total CPI Inflation

  26. Lessons for Domestic Policy • Macroprudential oversight of financial system • Mitigate procyclicality in banking regulation • National securities regulator • Monetary policy at low interest rates • Monetary policy should not ignore financial stability concerns

  27. Lessons for International Policy • Financial Stability Board - Bigger and Tougher • Common standards/rules for financial sector • College of supervisors of global financial institutions (peer review process) • Crisis resolution procedures for ``too big to fail`` • IMF – More resources and More Candid • + US$500B; New instruments: Flexible Credit Line • Better external and internal governance • Address financial stability; early warning system

  28. Extra Slides

  29. Commodity prices were rising and the loonie was strong

  30. Projection for Global Economic Growth

  31. Bank of Canada Liquidity Facilities Introduced Since 2007Q4

  32. Canadian Fiscal Stimulus

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