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? 1.Canada entered the crisis in much better shape 2.Canada adopted the right policies at the right time. 3.Canada will recover faster, despite being in a not- so-good neighbourhood Bottom line: 1.Important lessons can be learned from Canada 2.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 1.Financial Crisis began: August 2007 2.U.S. Recession began: December 2007 3.Lehman Bros Collapse: September 2008 4.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 1.Liquidity provision (Bank of Canada) 2.Bank liability guarantees (Government of Canada) – “Lenders Assurance Facility” 3.Support for credit markets (Government of Canada) 4.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: 1.Swaps of high quality, but less liquid assets for short-term government bonds 2.Collateralised loans Key innovations: Wider sets of participants and acceptable collateral

17. Credit Market Support 1.CDN $125B Insured Mortgage Purchase Program 2.Additional CDN $13B for Export Development Canada, Business Development Bank of Canada, and several other Crown corporations to facilitate trade and business credit 3.CDN $12B Canadian Secured Credit Facility, to support vehicle leasing through purchases of Asset Backed Securities

19. Canadian Fiscal Stimulus 1.Approximately CDN $40B or 2.5% of GDP 2.60% will be infrastructure spending 3.55% will be spend in 2009 and 2010 4.CDN $8.0B in permanent personal and corporate tax cuts 5.Leverage infrastructure/community spending with the provinces to reach CDN $50B

20. Monetary Policy Actions 1.Aggressive interest rate cuts: 425 basis points in 16 months to a target overnight rate of 0.25% 2.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

23. 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)

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

25. Outlook

26. Quarterly Canadian GDP Growth Forecast %

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

28. Projection for Total CPI Inflation

29. 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

30. Lessons for International Policy 1.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`` 2.IMF – More resources and More Candid + US$500B; New instruments: Flexible Credit Line Better external and internal governance Address financial stability; early warning system

31. Extra Slides

32. Commodity prices were rising and the loonie was strong

36. Share of real global GDP a (per cent) Projected growth (per cent) b 2008200920102011 United States 221.1 (1.2)-2.4 (-1.7)1.2 (2.6)2.9 European Union 200.7 (0.9)-3.6 (-1.0)-0.2 (2.1)1.8 Japan 7-0.7 (0)-6.2 (-1.7)0.1 (2.0)2.5 China and Asian NIEs c 147.1 (7.5)3.5 (5.6)6.0 (6.9)7.3 Others 374.9 (5.0)1.0 (2.7)3.0 (4.3)4.0 World 1003.2 (3.4)-0.8 (1.1)2.2 (3.7)3.7 a.GDP shares are based on IMF estimates of the purchasing-power-parity (PPP) valuation of country GDPs for 2006. Source: IMF, WEO Update, October 2008. b.Numbers in parentheses are projections from the January 2009 Monetary Policy Report Update. c.NIEs are newly industrialized economies. These include Hong Kong (Special Administrative Region), South Korea, Taiwan (Province of China), and Singapore. Source: Bank of Canada Projection for Global Economic Growth

37. Bank of Canada Liquidity Facilities Introduced Since 2007Q4 * This facility was replaced by the Term PRA for Private Sector Instruments on 16 March, 2009 ** In par-value terms

38. Canadian Fiscal Stimulus