The Bank for International Settlements has released a paper by Sami Alpanda, Gino Cateau and Césaire Meh, all of the Bank of Canada, titled A policy model to analyze macroprudential regulations and monetary policy:
We construct a small-open-economy, New Keynesian dynamic stochastic general-equilibrium model with real-financial linkages to analyze the effects of financial shocks and macroprudential policies on the Canadian economy. Our model has four key features. First, it allows for non-trivial interactions between the balance sheets of households, firms and banks within a unified framework. Second, it incorporates a risk-taking channel by allowing the risk appetite of investors to depend on aggregate economic activity and funding conditions. Third, it incorporates long-term debt by allowing households and businesses to pay back their stock of debt over multiple periods. Fourth, it incorporates targeted and broader macroprudential instruments to analyze the interaction between macroprudential and monetary policy. The model also features nominal and real rigidities, and is calibrated to match dynamics in Canadian macroeconomic and financial data. We study the transmission of monetary policy and financial shocks in the model economy, and analyze the effectiveness of various policies in simultaneously achieving macroeconomic and financial stability. We find that, in terms of reducing household debt, more targeted tools such as loan-to-value regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively.
This conclusion is supported by:
Using our model, we find that targeted policies such as LTV regulations are the most effective and least costly, followed by bank capital regulations and monetary policy, respectively. In particular, a 5 percentage point (pp) tightening in regulatory LTV decreases household debt by about 7.6 per cent at the peak, while its output impact is about 0.7 per cent. In contrast, a 1 pp increase in capital requirements reduces household debt by about 1.4 per cent and reduces output by about 0.35 per cent at the peak. Hence, an increase of about 2 pp in bank capital would have the same impact on output as a 5 pp reduction in LTV, but its impact on household debt would be about half of LTV at the peak. Similarly, a 100 basis point (bp) temporary increase in the policy rate reduces household debt by about 0.5 per cent at the peak, but this comes at an output cost of about 0.4 per cent, o¤ering an even worse trade-o¤ than capital requirements in terms of reducing household debt.
I’ll admit to being suspicious of this result, but without fully understanding and playing with the model I must also admit that I can’t explain why. I don’t like such finely targeted government policies, with some Pooh-Bah in Ottawa pronouncing on whether a citizen is permitted to buy a house or not. What if they get it wrong? They always do, eventually. Unaddressed in the paper is the effect of CMHC policies, which, in expanding the amount of mortgage insurance outstanding to a gargantuan extent, has thoroughly distorted the market, leading to today’s very high (although not necessarily excessive) debt levels and very high (although not necessarily excessive) housing prices.
It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 3bp, FixedResets off 7bp and DeemedRetractibles gaining 2bp. Volatility was average. Volume was low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1659 % | 2,637.8 |
| FixedFloater | 4.16 % | 3.41 % | 25,134 | 18.55 | 1 | -0.3923 % | 4,173.0 |
| Floater | 2.91 % | 3.07 % | 45,746 | 19.48 | 4 | -0.1659 % | 2,727.7 |
| OpRet | 4.05 % | -0.67 % | 97,938 | 0.08 | 1 | 0.0395 % | 2,728.2 |
| SplitShare | 4.28 % | 3.80 % | 115,889 | 3.94 | 5 | 0.0521 % | 3,153.8 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0395 % | 2,494.6 |
| Perpetual-Premium | 5.46 % | 0.41 % | 74,441 | 0.09 | 20 | 0.1494 % | 2,438.9 |
| Perpetual-Discount | 5.21 % | 5.13 % | 105,153 | 15.22 | 16 | 0.0321 % | 2,610.0 |
| FixedReset | 4.24 % | 3.71 % | 181,617 | 8.40 | 74 | -0.0666 % | 2,565.3 |
| Deemed-Retractible | 5.00 % | 1.45 % | 99,717 | 0.15 | 42 | 0.0180 % | 2,566.8 |
| FloatingReset | 2.62 % | 0.00 % | 74,741 | 0.08 | 6 | -0.0653 % | 2,533.0 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| FTS.PR.H | FixedReset | -1.48 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-09 Maturity Price : 20.70 Evaluated at bid price : 20.70 Bid-YTW : 3.75 % |
| PWF.PR.A | Floater | -1.11 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-09 Maturity Price : 20.52 Evaluated at bid price : 20.52 Bid-YTW : 2.57 % |
| IFC.PR.A | FixedReset | -1.03 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.00 Bid-YTW : 4.24 % |
| IGM.PR.B | Perpetual-Premium | 1.29 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2017-12-31 Maturity Price : 25.25 Evaluated at bid price : 26.00 Bid-YTW : 5.09 % |
| MFC.PR.F | FixedReset | 1.64 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.89 Bid-YTW : 4.25 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TD.PF.B | FixedReset | 194,678 | RBC crossed blocks of 49,600 and 50,000, both at 25.12. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-09 Maturity Price : 23.21 Evaluated at bid price : 25.11 Bid-YTW : 3.74 % |
| ENB.PF.A | FixedReset | 44,113 | RBC crossed 40,000 at 25.05. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-09 Maturity Price : 23.15 Evaluated at bid price : 25.02 Bid-YTW : 4.19 % |
| BAM.PR.P | FixedReset | 39,868 | Called for redemption September 30. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-30 Maturity Price : 25.00 Evaluated at bid price : 25.41 Bid-YTW : 3.20 % |
| GWO.PR.S | Deemed-Retractible | 36,400 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.53 Bid-YTW : 4.98 % |
| GWO.PR.N | FixedReset | 31,160 | CIBC crossed 18,000 at 21.77. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.70 Bid-YTW : 4.63 % |
| TRP.PR.B | FixedReset | 27,332 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-09 Maturity Price : 19.70 Evaluated at bid price : 19.70 Bid-YTW : 3.70 % |
| There were 20 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| IFC.PR.A | FixedReset | Quote: 24.00 – 24.28 Spot Rate : 0.2800 Average : 0.1802 YTW SCENARIO |
| PVS.PR.C | SplitShare | Quote: 25.81 – 26.90 Spot Rate : 1.0900 Average : 1.0096 YTW SCENARIO |
| TD.PR.T | FloatingReset | Quote: 25.35 – 25.61 Spot Rate : 0.2600 Average : 0.1808 YTW SCENARIO |
| BAM.PR.X | FixedReset | Quote: 22.51 – 22.70 Spot Rate : 0.1900 Average : 0.1233 YTW SCENARIO |
| BAM.PR.M | Perpetual-Discount | Quote: 21.64 – 21.81 Spot Rate : 0.1700 Average : 0.1111 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 21.70 – 21.95 Spot Rate : 0.2500 Average : 0.1918 YTW SCENARIO |