The Relationship between Unemployment Rate and Economic Growth across Canada

Among the ten provinces of Canada, Quebec showed the highest unemployment rate, in April 2020 (17 %). In January and February, the province of Quebec along with Manitoba and British Columbia recorded the lowest unemployment rate in Canada. In February 2020, the level of the unemployment rate in Quebec was 4.5 %, the lowest since 1976. The extent of the spread of the COVID-19 explains the high unemployment rate in Quebec. As a matter of fact, Quebec accounts for more than half of the confirmed cases of COVID-19 in Canada (44 197 cases out of 79 502, as of May 20). Most of these cases (about half) are in the region of Montreal that generates the third of Quebec's gross domestic product (GDP).

In the Prairie Provinces (i.e. Manitoba, Saskatchewan, and Alberta), the unemployment rates in April 2020 nearly doubled, compared to their historical averages (see Figure 1). For example, in Alberta, the unemployment rate was 13.4 % in April, versus an historical average of 6.4 %. In April, the unemployment rate in Alberta was the highest in the Prairies and also a record high in the history of this province.

Figure 1: Unemployment Rates across Canada.

The picture of the situation is different in Atlantic Canada (i.e. Newfoundland and Labrador, Prince Edward Island, Nova Scotia, and New Brunswick). In Newfoundland and Labrador, the unemployment rate in April 2020 (15.9 %) was very close to its historical average (16 %). This reminds that unemployment rate has often been very high in this province. (See my blogpost Unemployment Rate in Newfoundland and Labrador.) Prince Edward Island is the only province in Canada where the unemployment rate during the outbreak of COVID-19 has been lower than the historical average. As of May 20, only 27 cases of COVID-19 have been found in this province.

Throughout Canada, three economic sectors have been mainly affected by the lockdown restrictions: (1) accommodation and food services, (2) construction, (3) forestry, fishing, mining, quarrying, oil and gas. In the sector of accommodation and food services, between January and April 2020, the unemployment rate rose from 9 % to 44.7 % in Quebec, from 2 % to 30.9 % in Manitoba, from 4.7 % to 35 % in Saskatchewan, and from 5.9 % to 38.9 % in British Columbia.

In the sector of forestry, fishing, mining, quarrying, oil and gas, between January and April 2020, the unemployment rate rose from 8.7 % to 27.9 %, in Quebec. In the construction sector, while in Quebec the unemployment rate rose from 11.3 % in January to 40.3 % in April, it only rose from 5.4 % to 14 %, in Ontario.

In a previous post [here], I have used the Okun's law to predict GDP growth from changes in unemployment rates using data for Canada as a whole. In this post, I take things a bit further by estimating the Okun's law using instead data of the ten provinces (panel data). I have kept the short-run effect of unemployment on real GDP unchanged across the provinces and allow for heterogeneity only in the intercept. (This is referred to as a least squares dummy variable model, in econometrics.)

Figure 2 shows as scatter plot the changes in the annual unemployment rates and the corresponding GDP growth rates in the ten provinces, between 1981 and 2018. The blue line in this figure represents the predictions from the Okun's law. The estimate of the short-run effect of unemployment on real GDP is -1.45, which means a 1 percentage point increase in unemployment rate causes a 1.45 % decrease in real GDP. This estimate is close to the one obtained previously using aggregate data for Canada (-1.4). But, the explanatory power of this panel data model is much higher. It explains 58.5 % of the variability in the data versus 35 % for the model that uses aggregate Canadian data.

Figure 2: Okun's Law: Percentage Point Change in Unemployment Rate and Real GDP Growth Rate, Canadian Provinces, 1981-2018.

The table below reports the predictions of the real GDP growth rates for the ten provinces for the first quarter of 2020 and April 2020.

Table: Predictions of real GDP Growth Rates for the Provinces of Canada based on a Panel Data Model.

Province	First Quarter of 2020	April 2020
Newfoundland and Labrador (NL)	1.4 %	-4.1 %
Prince Edward Island (PE)	2.3 %	-.9 %
Nova Scotia (NS)	1.6 %	-2.6 %
New Brunswick (NB)	1.9 %	-4.7 %
Quebec (QC)	.9 %	-11.2 %
Ontario (ON)	1.5 %	-2.8 %
Manitoba (MB)	1.8 %	-5.2 %
Saskatchewan (SK)	.7 %	-3.7 %
Alberta (AB)	1.9 %	-3.8 %
British Columbia (BC)	1.5 %	-3.8 %

The Okun's model that uses panel data predicts a positive real GDP growth across Canada for the first quarter of 2020. This contrasts with the predictions I made previously using the aggregate Canadian data. On the other hand, it predicts negative growth rates across Canada for April 2020. However, it is worth pointing that these forecasts do not take into account the effects of the various economic stimulus programs initiated by the federal and the provincial governments in response to COVID-19.

Dataset and Code

The Relationship between Unemployment Rate and Economic Growth in Canada

The unemployment rate in Canada rose from 7.8 % in March to 13 % in April, due to the lockdown restrictions imposed by the federal and the provincial governments to stop the spread of the COVID-19. The average unemployment rate in Canada is 8.2 %. The highest ever recorded unemployment rate in five decades (13.1 %) was in December 1982.

In the early 1980s, unemployment, inflation, and interest rates were simultaneously very high in the most developed countries. In Canada, the unemployment rate was steadily above 10 %, between May 1982 and December 1985 (on average, 11.4 %). The second episode of high unemployment period Canada experienced was in the early 1990s. Particularly, between February 1991 and October 1994, unemployment rate rose, as a result of the restrictive monetary policy that aimed at curbing the high inflation inherited from the 1980s.

Since May 11, several economies have started easing the lockdown restrictions. As a result, one can expect unemployment to decline in May and over the coming months. More and more people are returning to work, as some businesses are allowed to reopen. Unfortunately, it is not all the layoff employees that are returning to work. Some businesses failed, due to the COVID-19 pandemic. The travel bans and the physical distancing rules in effect keep affecting the sector of accommodation and food services, where the unemployment rate rose from 18.4 % in March to 34.3 % in April, this year. The unemployment rate in this sector was 6.1 % in February.

The data on the Gross Domestic Product (GDP) of Canada (i.e., the value of the wealth created by Canadian residents) over the first quarter of 2020 are not released yet. But, it is certain that GDP will fall over the first quarter of this year. To predict the extent of this decline, one can use an economic relationship known as Okun's law. Okun's law predicts a consistent relationship between changes in the unemployment rate and the real GDP growth rate. In the US, a 1 percentage point increase in the unemployment rate is said to result in a 2 % decline in the real GDP. Given that the data for the unemployment rate in Canada are already available for the first quarter of 2020 and even for the month of April, I can use them to predict the decline in the real GDP by estimating the linear relationship suggested by Okun.

Even though there has been some deviations from the Okun's law over the years, I use it to predict the changes to expect the real GDP because of its simplicity. The scatter plot in the figure below shows the percentage point change in the unemployment rate and the corresponding real GDP growth rate in Canada. The data points associated with the periods of economic expansion are in green and those associated with the periods of recession are in red. During periods of expansion and recession, the expected quarterly GDP growth rates are respectively .74 % and -1.07 %.

Figure: Okun's Law: Percentage Point Change in Unemployment Rate and Real GDP Growth Rate, Canada, 1976:Q1-2019:Q4

In the above figure, the line in black represents the predictions of the Okun's law that make no distinction between periods of expansion and recession. The short-run effect of unemployment on real GDP from this linear model is -1.2, i.e., a 1 percentage point increase in the unemployment rate results in a 1.2 % decline in the real GDP. This linear model predicts a -.14 % decline in the real GDP during the first quarter of 2020.

In the above figure, the blue segment lines represent the predictions of the Okun's law conditional on the state of the business cycle. The conditional short-run effects of unemployment on real GDP are respectively -.66 and -.29 during periods of expansion and recession. This conditional model (referred to as Markov-switching model) predicts that the real GDP fell by .99 % in Canada, over the first quarter of 2020.

The table below summarizes the predictions of the real GDP growth rate based on the Okun's law.

Table: Predictions of real GDP Growth Rates for Canada based on the Okun's Law.

Stock Exchange	First Quarter of 2020	April 2020
Linear Model	-.14 %	-5.84 %
Markov-Switching Model	-.99 %	-2.34 %

Given the various financial assistance programmes initiated by the Liberal government of Justin Trudeau (which includes the Canada emergency response benefit that provides for a maximum of 16 weeks a weekly pay of $ 500 to layoff employees), the prediction of a decline of 2.34 % in real GDP in April is more realistic.

The updates on the global financial turbulence score will now be available in the tab "The Financial Barometers" of this blog.

Dataset and Code

Inflation and Unemployment over the Business Cycle: Comparing evidence from Canada and the United States

In an earlier post [here], I have analyzed the joint behavior of inflation and unemployment in Canada, over periods of economic expansion and contraction. In this post, I go on with this investigation using now data from the United States (US) and comparing then the new findings to the evidence from the Canadian economy.

Figure 1, below, shows the distribution of the inflation and unemployment rates in both countries over a period of time going from March 2001 to December 2019 (226 months). The distribution of the inflation rate in Canada appears to have a fatter and longer tail. In fact, in Canada, the monthly inflation rate over the period of interest fluctuated in the interval ±.54% whereas, in the US, it fluctuated between -.12% and .38%. However, both distributions are leptokurtic (i.e., their tails are fatter than those of a normally distributed variable). On the other hand, unlike the inflation rate, the distribution of the unemployment rate in the US is wider than its distribution in Canada.

Figure 1: Empirical Distributions of the Inflation and the Unemployment Rates in Canada and the US, 2001:M3-2019:M12.

It also appears in Figure 1 that, in both Canada and the US, the distribution of the unemployment rate peaks at two different points. This is what is called a bimodal distribution. In Canada, the lowest mode ( i.e., the unemployment rate associated to the first peak) has a lower probability of occurence than the highest mode. But, in the US, it is the lowest mode that has a higher probability of occurence.

Evidence 1: The distribution of the unemployment rate in Canada and the US is bimodal.

Evidence 1 implies that it is inappropriate to model the unemploymment rate assuming that it is a normally distributed variable. A normally distributed variable is bell-shaped, which implies it peaks only at one point. It is also inappropriate to model the inflation rate making such an assumption, due to the excess kurtosis in the data. (By excess kurtosis, I mean the fat tails of their distributions.) Therefore, an alternative and better way of modeling both the inflation and the unemployment rates is to use a Markov-switching multivariate normal model. A Markov-switching model assumes different unobserved states of the economy, which have their own unconditional and transition probabilities. Then, the conditional probability of an observation depends on the realized state.

Figure 2, below, plots the mixtures of two state-dependent normal distributions fitted to the inflation and the unemployment rates in Canada. Figure 3 that follows plots the estimates for the US. In both cases, the two-state Markov-switching normal model provides a better fit to the inflation rate than to the unemployment rate.

Figure 2 : Empirical Distribution and State-Dependent Distributions of the the Inflation and Unemployment Rates, Canada, 2001:M3-2019:M12.

Figure 3 : Empirical Distribution and State-Dependent Distributions of the the Inflation and Unemployment Rates, US, 2001:M3-2019:M12.

Tables 1 and 2, below, display the expected values of the inflation and the unemployment rates over the two states of the economy (expansion and contraction) respectively in Canada and the US. In Canada, the standard deviation of the unemmployment rate is .26 during periods of expansion and .48 during periods of contraction. In the US, this standard deviation is .76 and .97, respectively during periods of expansion and contraction. On the other hand, the standard deviation of the inflation rate does not change much over the two states.

Table 1: Expected values from a Markov-Dependent Mixture of Multivariate Normal models, Canada, 2001:M3-2019:M12.

	Expansion	Recession
Inflation Rate	.16 %	6.02 %
Unemployment Rate	.12 %	7.33 %

Table 2: Expected values from a Markov-Dependent Mixture of Multivariate Normal models, US, 2001:M3-2019:M12.

	Expansion	Recession
Inflation Rate	.17 %	5.00 %
Unemployment Rate	.13 %	8.56 %

Evidence 2: The volatility of the unemployment rate in Canada and the US is lower during the periods of economic expansion than during the periods of contraction.

Evidence 3: The inflation rate in Canada and the US is tends to be higher during the periods of economic expansion and lower during the periods of contraction. On the other hand, the unemployment rate tends to be higher during the periods of contraction.

While the correlation between the inflation and the unemployment rates is negative over the two states in the US, in Canada, it is negative only during the periods of contraction.

The use of higher-order Markov-switching models (i.e., models distinguishing between more than two states of the economy) has not helped improve the estimates of the marginal probabilities of the unemployment rate.

Dataset and Code

Inflation and Unemployment over the Business Cycle

I have analyzed the joint behavior of inflation and unemployment in Canada over a period of time ranging from March 2001 to December 2019 (226 months). My interest is to find out if there is any difference in the way these two variables behave during periods of economic expansion and contraction. This is done by fitting a two-state Markov-switching multivariate Student's t-model to the data.

The inflation and the unemployment rates have turned out to be more volatile over one state than the other. Decoding the states shows that the most volatile one corresponds to the periods of economic contraction that the Canadian economy experienced : the early 2000s crisis, the 2009 recession, and the oil price collapse of 2015. The volatility of the unemployment rate almost doubles during the high volatility state.

The figure below shows the densities of the inflation and the unemployment rates, and plot the marginal distributions of the fitted model. The second panel of this figure shows that the distribution of the unemployment rate is bimodal, with its lowest peak corresponding to the periods of economic expansion. It also appears that even though the Markov-switching multivariate Student's t-model has produced an accurate estimate of the expected value of the unemployment rate during periods of expansion, it overestimated its probability of occurence. The estimates for the inflation rate match the actual probabilities.

Figure : Densities and State-Dependent Distributions of the the Inflation and Unemployment Rates, Canada, 2001:M2-2019:M12.

The table below reports the expected values from the fitted models. The expected value of the inflation rate turns out to be higher during periods of expansion. On the other hand, the unemployment rate is lower during periods of expansion and higher during periods of contraction.

Table : Expected values from a Markov-Dependent Mixture of Multivariate Student's t-models, Canada, 2001:M2-2019:M12.

	Expansion	Recession
Inflation Rate	.16 %	6.01 %
Unemployment Rate	.12 %	7.28 %

The actual correlation between the inflation and the unemployment rates is positive during periods of economic expansion (.04) and negative during periods of contraction (-.02). This means that during periods of expansion, inflation is mostly driven by such supply-side factors as technological innovations, which lower prices and raise employment (decreasing unemployment, by so doing) at the same time. On the other hand, when the economy is contracting, inflation is mostly driven by factors affecting the demand-side of the economy such as preference shocks.

Dataset and Code

Unemployment in the Prairie Provinces

The collapse in the price of oil has caused an economic downturn in many provinces in Canada especially in the Prairies (Manitoba, Saskatchewan, and Alberta). Many businesses in the oil and related industries closed, people lost their jobs, and unemployment has risen.

The Prairie provinces used to have the lowest unemployment rates in Canada but this year unemployment rate in Alberta has gone above the national average. This has not been observed since December 1988. 

Unemployment Rates, Canada and the Provinces of the Prairies, 1981:M1-2016:M2

Unemployment in Alberta rose, in January this year, by 60.9% compared to January last year. In February, the year-to-year growth rate was 46.3%. 

Saskatchewan also experienced extremely high year-to-year growth in unemployment in the second half of last year. In July, last year, unemployment year-to-growth rate was 62.5%. 

But unemployment rate in Saskatchewan and Manitoba are still below the national average. A reason for that is in the importance of the oil and gas extraction industry in these economies. The average share of this industry is respectively 1.2%, 17.7%, and 27.8% in the economies of Manitoba, Saskatchewan, and Alberta. 

A way of reducing the vulnerability of the economy of Alberta is diversification.

Data 

Is Canada in Recession?

 Real gross domestic product (GDP) in Canada fell by .1% the first quarter of this year [here]. A question that keeps coming to people’s mind since then is whether Canada is in recession.

A recession is generally defined as a contraction in the economic activity over at least two consecutive quarters.  So the answer for our worry will depends on the GDP growth rate over the second quarter of this year. Statistics Canada has not yet released these data. But using the information available today, what could we predict?

Real GDP fell again in April. This is the fourth consecutive fall in real monthly GDP this year.  

Real GDP, Seasonally Adjusted, Canada, 1997:M1-2015:M4

The growth rate Canada experienced in April this year, -.07%, shows a slowdown in the pace of contraction of the economy. Growth rate was -.24% in January, -.15% in February, and -.2% in March.  One can expect a rise in GDP in May or June mainly due to seasonal effects.

My belief that GDP could increase in May or June is based on the decrease observed in the unemployment rate over the second quarter. At the end of the first quarter of 2015, unemployment rate was 7.4%. It went down to 6.5% in June.

June is a moment of year where the unemployment is low in Canada. The seasonal average unemployment rate in June is 6.9%. Thus, the 6.5% unemployment rate observed this year is below the seasonal average and a sign that the economy probably performed better than expected.

Unemployment Rate and its Seasonal Averages, Canada, 1997:M1-2015:M6

The Bank of Canada decreased today its key rate to .5%.This should simply been seen as a measure to stimulate the economy and not an official statement of recession. I do not believe we are already in recession.

The data used are available here. 

Unemployment Rate in Newfoundland and Labrador

The province of Newfoundland and Labrador has the highest unemployment rate in Canada [here]. The proportion of its active population looking for a main job is twice as high as the Canadian average. Between January 1976 and June 2014, the average unemployment rate is 16.26 % in Newfoundland and Labrador versus 8.41 % across Canada.

Some Economists attribute this high unemployment rate to the importance of seasonal jobs in the province [here]. As a matter of fact, such seasonal activities as fishing and seafood processing are prominent in the economy of Newfoundland and Labrador.

Seasonal activities can indeed explain some month to month variations in unemployment rate in Newfoundland and Labrador but to what extend? The figure and table below show average unemployment rates for each month as well as their decomposition into seasonal and trend components for both Newfoundland and Labrador and Canada. 

Figure: Unemployment Rate, Seasonally Unadjusted, Newfoundland and Labrador, Canada, 1976:M1-2014:M6, Data Source: Statistics Canada

Table: Seasonal Decomposition of Unemployment Rat, Newfoundland and Labrador, Canada, 1976:M1-2014:M6

Each year, unemployment rate is higher in Newfoundland and Labrador from January to May. It is, on average, above 17 % during this period. The seasonal variation in unemployment specific to each of these five months is positive but less important than the trend component. 

Let’s take for instance the month of April where unemployment rate, on average, peaks 18.57 %. Only 12.8% of this rate, which corresponds to 2.38 percentage points, has to do with seasonal variation. The other 16.19 percentage points are structural.

Unemployment rate in Newfoundland and Labrador is higher in winter than in summer due to seasonal variations in the economy but the fact that good or bad season this province often shows the worst record in Canada is a completely different matter.

My view is that unemployment rate is high in Newfoundland and Labrador because there are not enough job openings or there is no adequacy between the jobs and the qualifications available. The fact that the gap between unemployment rate in this province and the national average is narrowing following the energy and natural resource boom the province has witnessed recently shows that it is the structural lack of job openings rather than seasonal variations that explains the issue.

The gap between unemployment rate in Newfoundland and Labrador and the national average peaked 12.9 percentage points in Mars 1987. This gap reached the off-peak of 2.2 percentage points in September 2013.

Unemployment Rates Across Canada

Unemployment rate is an economic indicator frequently followed by news commentators, economists, governments, and oppositions throughout the world. It is the share of the labor force without any job and actively seeking one.  In Canada, the federal government is responsible for the employment insurance program and provincial governments are responsible for the other employment assistance programs and services that include: career advice, job search resources, support for self-employment, integration programs for immigrants, minorities, and disabled people … The level of the unemployment rate in a given province may depend on common factors such as: the state of the world economy or the employment insurance rules. It may also simply depend on the geographic location of the province or  rather on province-specific factors such as:  the production capacity of the province, the types of jobs that are available, the effectiveness of the province's employment policy …

In this post, I describe the evolution of unemployment rate in the ten provinces of Canada between January 1976 and November 2013 and compare it to the national average. Unemployment rate turns out to be particularly higher on the East coast of Canada than in the rest of the country.

The three figures below plot the evolution of the unemployment rates in the ten provinces grouped by region: the Atlantic provinces (Newfoundland and Labrador, Prince Edward Island, Nova Scotia, and New Brunswick) , the Central provinces (Quebec, Ontario), the Prairie provinces (Manitoba, Saskatchewan, Alberta), and the West Coast (British Columbia). 



Figure 1: Unemployment Rates in Canada and its Atlantic Provinces, Seasonally Adjusted, 1976:1-2013:11, Data Sources: Statistics Canada.



Figure 2: Unemployment Rates in Canada and its Central Provinces, Seasonally Adjusted, 1976:1-2013:11, Data Sources: Statistics Canada.

Figure 3: Unemployment Rates in Canada and its Prairie and Western Provinces, Seasonally Adjusted, 1976:1-2013:11, Data Sources: Statistics Canada.

In my earlier post titled Unemployment Rates in Canada and the US, I described how unemployment rose in Canada in relation to some world major economic crises: the 1970s oil crises, the early 1980s crisis, the 1990 oil shock, and the global recession of 2008-2012. The figures above show that the rises in the national average rate stemmed from increased unemployment not just in some but in all the provinces across the country. Particularly, figure 2 shows the closeness of the dynamics of the national unemployment rate to those of Quebec, Ontario.

Besides, one also notice from the figures that the distribution of unemployment rate across the country reflects a neighborhood effect, i.e., unemployment rate is higher than the national average in the Atlantic Provinces and the neighboring Quebec, and lower in Ontario and the Prairie provinces.  Table 1 below reports the average unemployment rates across the country.  

The province of Newfoundland and Labrador exhibits the highest and more volatile unemployment rate in Canada and Saskatchewan exhibits the lowest and less volatile rate. The highest unemployment rate in Canada occurred in Newfoundland and Labrador in September 1984 and the lowest rate occurred in Alberta in October 2006. Statistical tests confirm that unemployment rate in:

• Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Quebec, and British Columbia are higher than the national average,
• Ontario, Manitoba, Saskatchewan, and Alberta are lower than the national average.

See Also

Garcilazo, Jose E and Spiezia, Vincenzo (2007) Regional Unemployment Clusters: Neighborhood and State Effects in Europe and North America, The Review of Regional Studies, vol 37, no 3, pp 282-302.   

Unemployment Rates in Canada and the US

In this post, I describe the evolution of unemployment rate in Canada between January 1976 and November 2013 and compare it to that of the United States (US). I have particularly linked periods of high unemployment to the state of the world economy pointing out the major economic crises the two countries experienced, their consequences, and some policy actions they took. 
Some major crises Canada and the US experienced over 1976-2013 are: the oil crises of the 1970s, the early 1980s crisis, the 1990 oil price shock, and the 2008-2012 global recessions.

Unemployment rate is the share of people fit and available for work that are seeking a main job. Its level may also depend on other factors such as the unemployment benefits eligibility rules that I abstract from here.

The figure below plot monthly unemployment rates in Canada and the US.

Figure: Unemployment Rates, Canada and US, 1976:1-2013:11, Seasonally Adjusted,

Data Sources: Statistics Canada and Federal Reserve Bank of St Louis.



The above figure shows that unemployment rate tends to be higher and more volatile in Canada than in the US. The average unemployment rate in Canada over the sample period is 8.43 % and 6.49 % in the US. The standard deviations for the two countries are respectively 1.65 and 1.59. The highest rate over the sample period is 13.1 % and occurred in Canada in December1982. The highest rate the US experienced, 10.8 %, occurred one month earlier.

There are particularly two periods where unemployment rate was in a row above 10 % in Canada: the period ranging from May 1982 to December 1985 and the one ranging from February 1991 to October 1994. During these two periods, unemployment rate was also high in the US.

I now review the economic events that are related to the high periods of unemployment in both countries.

The Oil Crises of the 1970s and the Crisis of the Early 1980s

In October 1973, the Organization of the Petroleum Exporting Countries raised by 70 % the price of crude oil, cut-off its supply, and proclaimed a total embargo on oil deliveries to the US in response to its support to Israel in the Yom-Kippur war. This was the first oil crisis that lasted till March 1974. This oil shock fueled inflation. Inflation rate in the US was 6.07 % in 1973 and 10.45 % the following year. In Canada, the inflation rates in 1973 and 1974 were respectively 7.22 % and 10.43 %.

The second oil shock took place in 1979 after the Iranian Revolution when oil exports from Iran, the second largest oil producer, were suspended. Prices kept increasing worldwide. In October 1979, the US central bank, the Federal Reserve Bank (the Fed, in short), operated a policy shift in order to bring down inflation. It allowed its key interest rate, the federal funds rate, to rise in response to an expected increase in inflation. The aim was to reduce money demand and bring money supply back to its targeted growth rate. Under this monetary policy operating procedure that ended in 1982, when inflation was going to reach the peak of 12.66 % at the end of 1980, the effective federal funds rate already hit the high of 19.1 % per annum in June.

To ease the damages of high and volatile US short-term interest rates on the Canadian economy,   the Bank of Canada also operated a switch in the conduct of its monetary policy in March 1980.  Its key interest rate, the discount rate, became again a floating rate that was linked to the three-month treasury bill rate set at the federal government weekly bill auction.  In 1981, the inflation rate in Canada peaked 11.75 % and the Bank of Canada’s discount rate, responding to market forces, reached a historical high of 21.03 % per annum in August of the same year.  Over six consecutive quarters starting from the second half of 1981, the real gross domestic product (GDP) fell. GDP at end of 1982 was 5.03 % below its level of June 1981.

The high unemployment rates observed in Canada and the US in the early 1980s is the result of the contraction in the economic activity occasioned by the tightening of monetary policy by the Bank of Canada and the Fed.

The Savings and Loan (S&L) Crisis of the 1980s and 1990s in the US

The rise in short-term interest rates raised S&L institutions’ interest payments on deposits compared to the returns on their portfolios largely made up of fixed-rate mortgage loans. They then started losing money. About a quarter of the 3234 S&L in the US failed causing inter alia, many job losses in the finance industry.   

The 1990 Oil Price Shock

In August 1990, Iraq invaded and annexed Kuwait, its southern neighbor, setting off the First Gulf War.  The United Nations authorized military operation named Desert Storm freed the country in February 1991. Retreating from Kuwait, Iraqi military forces set fire to more than 600 oil wells. During that war, oil supplies from both countries were disrupted pushing up its price. This rise was instrumental in the recession of the early 1990s. Inflation hit a peak of 5.28 % in 1990 in the US.  Canada experienced an inflation of 5.47 % in 1991. In anticipation to this peak, market forces drove the Bank of Canada’s key interest rate to the peak of 14.05 % per annum in May 1990. This tightening of monetary policy brought the economy below its production capacity causing the double digit unemployment rates Canada experienced between November 1991 and May 1994. When the government entrusted the Bank of Canada with bringing down inflation to 2% by the end of 1995, the Bank key interest rate went from 10.02 % in February 1991 to 4.1 % three years later.

The 2008-2012 Global Recession

It originated from the 2008 financial crisis. As effects of that recession on the US economy, one can mention the downturn in the stock market, the decline in the sales of cars and real estates, the bankruptcy of many businesses, and the prolonged unemployment. Between 2008 and 2009, GDP fell over four consecutive quarters. It fell by 2.18 % over the last quarter of 2008. This was the worst US growth rate since the beginning of 1958.  In Canada, real GDP also fell between 2008 and 2009. It recorded a growth rate of -1.62 %, its worst, at the beginning of 2009. In October 2008, the unemployment rate in the US start exceeding that in Canada what has not occurred since August 1981.

A Reading List

Bank of Canada, Why has Canada’s Inflation TargetBeen Set a 2 Per Cent? 

Bank of Canada, Monetary Policy

Bank of Canada, A History of the Canadian Dollar, Return to a Floating Rate (June1970-Present)

Bank of Canada, A History of the Key Interest Rate

Walsh, Carl E (2003) Monetary Theory and Policy, 2^nd edition, The MIT Press, pp 164-6.
Wikipedia, List of Economic Crises, www.wikipedia.org.