The Real‐Time Properties of the Bank of Canada's Staff Output Gap Estimates

Champagne, Julien; Poulin-Bellisle, Guillaume; Sekkel, Rodrigo

doi:10.1111/jmcb.12493

Cited by 17 publications

(19 citation statements)

References 39 publications

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“…When available, we use these additional forecasts.17 SeeMacklem (2002) for details about the information and analysis presented by the staff to the Governing Council. We highlight the fact that these are staff estimates and thus may not be the same estimates provided in the MPR, the Bank of Canada publication containing detailed economic analysis and economic outlook and representing the view of the Governing Council, available every quarter since 2001.18 For example,Champagne et al (2016) use the same projections dataset to study the real-time properties of the Bank of Canada's staff output gap estimates.…”

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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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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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“…Evaluating out-of-sample inflation forecasts by means of a standard Phillips curve forecasting equation manifests the finding in the literature that no statistically meaningful distinction can be made between differently filtered gap measures (see e.g. Edge and Rudd, 2016;Champagne et al, 2018;Kamber et al, 2018). This reflects the general difficulty of beating univariate inflation forecast models with output gap based models (Atkeson and Ohanian, 2001;Fisher et al, 2002;Orphanides and van Norden, 2005;Watson, 2007, 2008), rather than output gap measurement problems.…”

Section: Introductionmentioning

confidence: 85%

“…Ever since Orphanides and van Norden (2002) have provided evidence for the poor real-time performance of commonly used output gap estimation methods, the debate regarding the reliability of output gap estimates has been vivid. 1 Recently, Edge and Rudd (2016) and Champagne et al (2018) have shown that the reliability of Federal Reserve and Bank of Canada staff output gap estimates has increased since the mid-1990s, while the reliability of purely statistical detrending procedures, like, for example, the Hodrick-Prescott (HP) filter, continues to be poor. In a recent article, Hamilton (2018b) has proposed a new regression based filter for detrending time series as an alternative to the HP filter.…”

Section: Introductionmentioning

confidence: 99%

Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter

Quast

Wolters

2020

Journal of Business & Economic Statistics

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We propose a simple modification of the time series filter by Hamilton (2018) that yields reliable and economically meaningful real-time output gap estimates. The original filter relies on 8-quarter-ahead forecast errors of a simple autoregression of log real GDP. While this approach yields a cyclical component of GDP that is hardly revised with new incoming data due to the one-sided filtering approach, it does not cover typical business cycle frequencies evenly, but short business cycles are muted and medium length business cycles are amplified. Further, the estimated trend is as volatile as GDP itself and can thus hardly be interpreted as potential GDP. A simple modification that is based on the mean of 4-to 12-quarter-ahead forecast errors shares the favorable real-time properties of the Hamilton filter, but leads to a much better coverage of typical business cycle frequencies and a smooth estimated trend. Based on output growth and inflation forecasts and a comparison to revised output gap estimates from policy institutions, we find that real-time output gaps based on the modified Hamilton filter are economically much more meaningful measures of the business cycle than those based on other simple statistical trend-cycle decomposition techniques such as the HP or the Bandpass filter.

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“…Because the neutral policy rate is not Bank of Canada staff have tended to overpredict the output gap and the policy interest rate. As discussed in Champagne (2018b), the magnitude of revisions to real-time estimates of the output gap have generally fallen over time. Consistent with the results from the forecast error decompositions displayed in figure 6, Bank of Canada staff appear to have tendency to overpredict the output gap when making their forecasts, particularly over 1993-1998 and 2011-2014.…”

Section: The Output Gap and The Neutral Nominal Policy Rate In Rementioning

confidence: 99%

How to Improve Inflation Forecasting in Canada

Matheson¹

2019

IMF Working Papers

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Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.

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The Real‐Time Properties of the Bank of Canada's Staff Output Gap Estimates

Cited by 17 publications

References 39 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

Reliable Real-Time Output Gap Estimates Based on a Modified Hamilton Filter

How to Improve Inflation Forecasting in Canada

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