Canadian Monetary Policy: Will the Checklist Approach Ever Get us to Price Stability?

Racette, Daniel; Raynauld, Jacques

doi:10.2307/135767

Cited by 14 publications

(9 citation statements)

References 13 publications

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“…For example, Fortin (1979), Courchene (1981), Kuszczak and Murray (1986) and various press releases (e.g., Bank of Canada (1992, 1993) all point to the Bank reacting to movements in U.S. rates and/or changes in the USD/CAD exchange rate at different points in time. Racette and Raynauld (1992), Lubik and Schorfheide (2007) and Alstadheim et al (2013) provide empirical evidence that the nominal exchange rate has been part of the Bank of Canada policy rule.…”

Section: Identificationmentioning

confidence: 99%

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Champagne

Sekkel

2018

Journal of Monetary Economics

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Quantifying the effects of monetary policy is challenging and has generated a vast literature in empirical macroeconomics. Much of this literature uses vector autoregressions (VARs), identified with different approaches, and finds that the effects of monetary policy for the U.S. are relatively modest, with peak decline estimates ranging between 0.3 and 1 per cent for output following a 100-basis-point monetary innovation. However, Romer and Romer (2004; R&R henceforth) find much larger effects of U.S. monetary policy shocks using narrative methods. This strategy uses historical records to construct a series of intended interest rate changes at meetings of the Federal Open Market Committee (FOMC) and then isolate the innovations to these interest rate changes that are orthogonal to the Federal Reserve's information set. A 100-basis-point shock from the R&R shock series translates into output and price level peak declines larger than 4 per cent. The study by Cloyne and Hurtgen (2016) extends the narrative approach to the U.K. and is, to our knowledge, the only one applying narrative methods to a country other than the U.S. Another important body of literature in monetary economics has documented important shifts in the conduct of monetary policy in the U.S. and abroad. Some prominent papers, such as Clarida et al. (2000), document that U.S. monetary policy has become more responsive to expected inflation after the Volcker disinflation. There is also evidence that monetary policy rules in small open economies have also changed significantly. For example, Alstadheim et al. (2013) show that the central banks of the U.K., Sweden and Canada shifted away from responding to exchange rate movements around the 1990s, when these countries implemented inflation-targeting (IT) regimes. Our paper builds on these two strands of literature and applies the narrative approach to Canada, providing new evidence on the macroeconomic effects of monetary policy and highlighting the importance of changes in the conduct of systematic monetary policy. We use historical documents to construct a series of intended changes in the target policy interest rate along with a novel database of real-time data and forecasts assembled from the Bank of Canada's staff economic projections from 1974 to 2015, to isolate the innovations to the intended policy changes that are orthogonal to the policymakers' information set. We find that following a 100-basis-point monetary policy shock, real monthly GDP has a peak decline of 1.0 per cent about 18 to 24 months after the shock and is less than 0.5 per cent lower after three years, while the price level (consumer price index) response is weaker and takes longer to materialize, falling by 0.4 per cent after three years. We show that it is crucial for these results to depart from R&R in two important ways: (i) by controlling for U.S. interest rates as well as the USD/CAD exchange rate in the policy-makers' information set, and (ii) by accounting for the structural break in the conduct of monetary policy caused ...

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Section: Identificationmentioning

confidence: 99%

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Champagne

Sekkel

2018

Journal of Monetary Economics

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“…For example, Racette and Raynauld (1992) study a Bayesian VAR model of the Canadian economy using the monetary base and R90 as possible instruments of monetary policy. For example, Racette and Raynauld (1992) study a Bayesian VAR model of the Canadian economy using the monetary base and R90 as possible instruments of monetary policy.…”

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confidence: 99%

Cash Setting, the Call Loan Rate, and the Liquidity Effect in Canada

Fung¹,

Gupta²

1997

The Canadian Journal of Economics

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.Abstract. In this paper, we use the vector autoregression method to examine the effects of monetary policy in Canada including, in particular, the empirical evidence of the liquidity effect. We use the excess cash reserves of the chartered banks and the surprise component of excess cash reserves as measures of liquidity. Shocks to monetary policy are measured by the orthogonalized innovations to the liquidity variables and by the orthogonalized innovations to the call loan rate. We find that the effects of these shocks conform to monetary policy shocks and the results support the presence of the liquidity effect in Canada.Etat des reserves-encaisse, le taux des prets a vue, et l'effet de liquidite au Canada. Les auteurs font appel a un mod&le vectoriel autor6gressif en vue d'examiner les effets de la politique mon6taire au Canada, en particulier, sur le plan empirique, l'effet de liquidit6. Les variables qu'ils utilisent pour mesurer le volume des liquidit6s sont les r6serves-encaisse exc6dentaires des banques et l'6cart entre le montant pr6vu de ces r6serves et l'offre effective de r6serves. Les chocs de politique mon6taire sont represent6s par des chocs orthogonaux appliqu6s aux mesures de liquidit6 et au taux des prets a vue. Selon les r6sultats obtenus, les effets des chocs appliqu6s a ces variables sont analogues a ceux qu'un choc de politique mon6taire est susceptible de produire, ce qui corrobore l'existence de l'effet de liquidit6 au Canada.The purpose of this paper is to study the effects of monetary policy in Canada, in particular, the empirical evidence of the liquidity effect. We investigate how strong and persistent the liquidity effect is. In the presence of such an effect, the initial impact of an unanticipated expansionary monetary policy is to lower nominal and real interest rates for a short period of time. As a result, labour employment, investment, and output increase. Eventually, however, the anticipated inflation effect will come into force and dominate the liquidity effect as people adjust their inflation expectations to the new money growth rate. Therefore, interest rates will then increase and the expansion in economic activity will stop. The strength of the liquidity effect can be measured by the size of the negative response of interest rates to expansionary policy, and its persistence can be measured by the time elapsed before interest rates start to rise. Recently, there has been a surge of interest and significant progress in the study of the liquidity effect. Empirical studies by Christiano and Eichenbaum (1992) and Strongin (1995) find strong evidence supporting the presence of liquidity effects in the United States. General equilibrium models by Luc...

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“…As a small, relatively open economy Canada's macroeconomic indicators have been shown to be very sensitive to their US counterparts. In particular, Racette and Raynauld (1992) Even in this low dimension, we find that all of our models substantially outperform the AIC and BIC benchmarks across both forecast horizons, with the Sparse Lag Group VARX-L achieving superior performance at both horizons. This low-dimensional example is better suited toward lag based groupings than our previous application.…”

Section: Canadian Macroeconomic Data Applicationmentioning

confidence: 73%

VARX-L: Structured regularization for large vector autoregressions with exogenous variables

Nicholson

Matteson

Bien

2017

International Journal of Forecasting

173

137

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The vector autoregression (VAR) has long proven to be an effective method for modeling the joint dynamics of macroeconomic time series as well as forecasting. A major shortcoming of the VAR that has hindered its applicability is its heavy parameterization: the parameter space grows quadratically with the number of series included, quickly exhausting the available degrees of freedom. Consequently, forecasting using VARs is intractable for low-frequency, high-dimensional macroeconomic data. However, empirical evidence suggests that VARs that incorporate more component series tend to result in more accurate forecasts. Conventional methods that allow for the estimation of large VARs either tend to require ad hoc subjective specifications or are computationally infeasible. Moreover, as global economies become more intricately intertwined, there has been substantial interest in incorporating the impact of stochastic, unmodeled exogenous variables. Vector autoregression with exogenous variables (VARX) extends the VAR to allow for the inclusion of unmodeled variables, but it similarly faces dimensionality challenges.We introduce the VARX-L framework, a structured family of VARX models, and provide methodology that allows for both efficient estimation and accurate forecasting in high-dimensional analysis. VARX-L adapts several prominent scalar regression regularization techniques to a vector time series context in order to greatly reduce the parameter space of VAR and VARX models. We also highlight a compelling extension that allows for shrinking toward reference models, such as a vector random walk. We demonstrate the efficacy of VARX-L in both lowand high-dimensional macroeconomic forecasting applications and simulated data examples. Our methodology is easily reproducible in a publicly available R package.

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Canadian Monetary Policy: Will the Checklist Approach Ever Get us to Price Stability?

Cited by 14 publications

References 13 publications

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada

Cash Setting, the Call Loan Rate, and the Liquidity Effect in Canada

VARX-L: Structured regularization for large vector autoregressions with exogenous variables

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