Economics students move onto national final in Bank of Canada competition

Four economics students placed in the top five at the Governor’s Challenge on Nov. 27, a competition organized by the Bank of Canada that simulates monetary policy decision-making by putting students in the role of the advisor to the Bank’s Governing Council. At this competition, each team of undergraduate university students has to advise the Bank what is the appropriate course of action for monetary policy in Canada and to support the recommendation with research on the state of the economy and potential risks.

The University of Saskatchewan is represented by the following team of economics undergraduate students (from left to right on the picture):

• Rainer Kocsis
• Danusha Rajapaksa
• Nick Hotsko
• Blair Baillargeon

The team is coached by two faculty members in Economics, Dr. Maxym Chaban and Dr. Enchuan Shao. Dr. Shao’s several years of experience working with the Bank of Canada are especially helpful.

On Nov. 27, the first round of competition was among Universities in the Western Canada (Manitoba, Saskatchewan, Alberta, and British Columbia). The U of S team made it through the first round and is one of the five teams going for the national competition in Ottawa on February 9, 2016.

The team had to make projections of GDP growth and inflation in Canada. This is because monetary policy is forward looking and when making a decision on interest rates it is important to project growth in Canada for up to two years ahead. The team was also researching on the situation in Canada, the United States, China, and world markets. Looking at Canada there was a concern that business investment declined in the first half of the year, while at the same time corporations tend to increase their cash holdings. Looking at the United States is important because it is the main trading partner of Canada. On the one hand, an unexpected growth in the United States would result in higher exports from Canada. On the other hand, if interest rates start to rise in the United States, it could create risks for the Canadian housing market and household debts.

China is important for Canada because of the demand for our primary commodities. As China slows its growth and undergoes a transformation from a manufacturing export-oriented economy towards a service based economy the demand of commodities is expected to slow. This would be a negative terms-of-trade shock for Canada lowering incomes especially in the commodity-exporting regions. Some of this adjustment has already taken place with the price of oil dropping significantly and prices for other commodities beginning to decline as well.

The team paid special attention to the housing market in Canada. Looking at housing prices there is a substantial increase in the price of housing especially in some markets. Given that the terms-of-trade decline for Canada in the light of low commodity prices and that there is an increase in the supply of housing, a risk is that the housing prices will undergo a correction. While housing is not big part of GDP it possess a risk to the banking industry if many households will default on their mortgages. There are positive signs of the correction in the housing markets with the number of housing permits declining but the question remains with respect to what would happen to interest rates especially in the United States.

Every member of the team has found the experience working on the recommendation and conducting research worthwhile. The experience nicely complements training in academic courses as it focuses more on dealing with data from Statistics Canada and a lot of reading on the current state of the economy.

The department plans to offer Econ 3xx “Monetary Policy” in the next academic year which would offer experiential learning related to the competition. Students interested to participate in this type of activity are encouraged to take this reading course next year.

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