1,421 Works

Estimates of the Sticky-Information Phillips Curve for the United States, Canada, and the United Kingdom

Hashmat Khan & Zhenhua Zhu
Mankiw and Reis (2001a) have proposed a "sticky-information"-based Phillips curve (SIPC) to address some of the concerns with the "sticky-price"-based new Keynesian Phillips curve. In this paper, we present a methodology for the empirical implementation of the SIPC for closed and open economies. We estimate its key structural parameter—the average duration of information stickiness—for the United States, Canada, and the United Kingdom. The benchmark results (with forecasting horizons of firms of seven to eight quarters)...

Estimated DGE Models and Forecasting Accuracy: A Preliminary Investigation with Canadian Data

Kevin Moran & Veronika Dolar
This paper applies the hybrid dynamic general-equilibrium, vector autoregressive (DGE-VAR) model developed by Ireland (1999) to Canadian time series. It presents the first Canadian evidence that a hybrid DGE-VAR model may have better out-of-sample forecasting accuracy than a simple, structure-free VAR model. The evidence suggests that estimated DGE models have the potential to add good forecasting ability to their natural strength of adding structure to an economic model.

Entrepreneurship, Inequality, and Taxation

Cesaire Meh
This paper confirms the conjecture that the evaluation of tax policy leads to very different conclusions once the role of entrepreneurs is considered. Contrary to previous literature, the author finds that switching from a progressive to a proportional income tax system has a negligible effect on wealth inequality in the United States. This surprising result arises because entrepreneurial activities moderate the effects of the policy change on the wealth distribution. The author shows that proportional...

The Global Financial Cycle, Monetary Policies and Macroprudential Regulations in Small, Open Economies

Gregory Bauer, Gurnain Pasricha, Rodrigo Sekkel & Yaz Terajima
This paper analyzes the implications of the global financial cycle for conventional and unconventional monetary policies and macroprudential policy in small, open economies such as Canada. The paper starts by summarizing recent work on financial cycles and their growing correlation across borders. The resulting global financial cycle may be followed by a financial crisis that is quite costly. The cycle causes time variation in global risk premia in fixed income, equity and foreign exchange markets....

Gaining Credibility for Inflation Targets

James Yetman
In this paper, I consider a simple model in which agents learn about the inflation target of a central bank over time by observing the policy instrument or inflation outcomes. Measuring credibility as the distance between the perceived target and the actual target, an increase in credibility is beneficial to the central bank because it brings the policy consistent with attaining the inflation target closer to that required to attain the output target. In this...

The Impact of Macroprudential Housing Finance Tools in Canada: 2005–10

Jason Allen, Timothy Grieder, Brian Peterson & Tom Roberts
This paper combines loan-level administrative data with household-level survey data to analyze the impact of recent macroprudential policy changes in Canada using a microsimulation model of mortgage demand of first-time homebuyers. Policies targeting the loan-to-value ratio are found to have a larger impact than policies targeting the debt-service ratio, such as amortization. This is because there are more wealth-constrained borrowers than income-constrained borrowers entering the housing market.

Evaluating Linear and Non-Linear Time-Varying Forecast-Combination Methods

Fuchun Li & Greg Tkacz
This paper evaluates linear and non-linear forecast-combination methods. Among the non-linear methods, we propose a nonparametric kernel-regression weighting approach that allows maximum flexibility of the weighting parameters. A Monte Carlo simulation study is performed to compare the performance of the different weighting schemes. The simulation results show that the non-linear combination methods are superior in all scenarios considered. When forecast errors are correlated across models, the nonparametric weighting scheme yields the lowest mean-squared errors. When...

Modelling Mortgage Rate Changes with a Smooth Transition Error-Correction Model

Ying Liu
This paper uses a smooth transition error-correction model (STECM) to model the one-year and five-year mortgage rate changes. The model allows for a non-linear adjustment process of mortgage rates towards their long-run equilibrium. We also introduce time-varying thresholds into the standard STECM specification, to capture the gradual structural changes in the error-correction term. We find that the STECM, whether with fixed or time-varying thresholds, yields better in-sample fit and lower forecast errors than the linear...

Do Central Banks Respond to Exchange Rate Movements? Some New Evidence from Structural Estimation

Wei Dong
This paper investigates the impact of exchange rate movements on the conduct of monetary policy in Australia, Canada, New Zealand and the United Kingdom. We develop and estimate a structural general equilibrium two-sector model with sticky prices and wages and limited exchange rate pass-through. Different specifications for the monetary policy rule and the real exchange rate process are examined. The results indicate that the Reserve Bank of Australia, the Bank of Canada and the Bank...

On Commodity-Sensitive Currencies and Inflation Targeting

Kevin Clinton
Two aspects of the recent monetary history of Canada, Australia, and New Zealand stand out: the sensitivity of their dollars to prices of resource-based commodities, and inflation targeting. This paper explores various aspects of these phenomena. It uses standard empirical models, and an investigation of the different approaches to inflation targeting in the three countries—including a case study of the 1998 international financial crisis—to assess how well a floating currency serves a resource-rich economy, and...

Globalization and Inflation: The Role of China

Denise Côté & Carlos De Resende
In this paper, we develop a theoretical model which identifies four channels–import prices, competition with domestic suppliers and workers, and commodity prices–through which price- and wage-setting conditions in country j may affect inflation in country i. We estimate a dynamic inflation equation derived from the theoretical model using a quarterly dataset of eighteen OECD countries over the 1984-2006 period. Although our methodology can be applied to any pair of countries, we focus on the effect...

The Welfare Implications of Fiscal Dominance

Carlos De Resende & Nooman Rebel
This paper studies the interdependence between fiscal and monetary policy in a DSGE model with sticky prices and non-zero trend inflation. We characterize the fiscal and monetary policies by a rule whereby a given fraction k of the government debt must be backed by the discounted value of current and future primary surpluses. The remaining fraction of debt is backed by seigniorage revenues. When k = 1, there is no fiscal dominance, since the fiscal...

Downward Nominal Wage Rigidity in Canada: Evidence from Micro- Level Data

Dany Brouillette, Olena Kostyshyna & Natalia Kyui
We assess the importance of downward nominal wage rigidity (DNWR) in Canada using both firm- and worker-level microdata. In particular, we analyze employer-level administrative data from the Major Wage Settlements (MWS) and household-based survey data from the Survey of Labour Income Dynamics (SLID). MWS data cover large unionized firms in Canada, while SLID is a rich rotating panel representative of the employed population in Canada. Combining both sources of information allows for a more extensive...

Non-Linearities, Model Uncertainty, and Macro Stress Testing

Miroslav Misina & David Tessier
A distinguishing feature of macro stress testing exercises is the use of macroeconomic models in scenario design and implementation. It is widely agreed that scenarios should be based on "rare but plausible" events that have either resulted in vulnerabilities in the past or could do so in the future. This requirement, however, raises a number of difficult statistical and methodological problems. Economic models, as well as the statistical models of the relationships among economic variables,...

The Role of Bank Capital in the Propagation of Shocks

Cesaire Meh & Kevin Moran
Recent events in financial markets have underlined the importance of analyzing the link between the financial health of banks and real economic activity. This paper contributes to this analysis by constructing a dynamic general equilibrium model in which the balance sheet of banks affects the propagation of shocks. We use the model to conduct quantitative experiments on the economy's response to technology and monetary policy shocks, as well as to disturbances originating within the banking...

Are Long-Horizon Expectations (De-)Stabilizing? Theory and Experiments

George Evans, Cars Hommes, isabelle salle & Bruce McGough
Most models in finance assume that agents make trading plans over the infinite future. We consider instead that they are boundedly rational and may only form forecasts over a limited horizon.

Empirical Likelihood Block Bootstrapping

Jason Allen, Allan W. Gregory & Katsumi Shimotsu
Monte Carlo evidence has made it clear that asymptotic tests based on generalized method of moments (GMM) estimation have disappointing size. The problem is exacerbated when the moment conditions are serially correlated. Several block bootstrap techniques have been proposed to correct the problem, including Hall and Horowitz (1996) and Inoue and Shintani (2006). We propose an empirical likelihood block bootstrap procedure to improve inference where models are characterized by nonlinear moment conditions that are serially...

Policy Coordination in an International Payment System

James Chapman
Given the increasing interdependence of both financial systems and attendant payment and settlement systems a vital question is what form should optimal policy take when there are two connected payment systems with separate regulators. In this paper I show that two central banks operating in a non-cooperative way will not have an incentive to achieve the optimal allocation of goods. I further show that this non-cooperative outcome will be supported by a zero intraday interest...

Systemic Risk and Collateral Adequacy

Radoslav Raykov
Many derivatives markets use collateral requirements calculated with industry-standard but dated methods that are not designed with systemic risk in mind. This paper explores whether the conservative nature of conventional collateral requirements outweighs their lack of consideration of systemic risk.

Online Privacy and Information Disclosure by Consumers

Shota Ichihashi
A consumer discloses information to a multi-product seller, which learns about the consumer’s preferences, sets prices, and makes product recommendations. While the consumer benefits from accurate product recommendations, the seller may use the information to price discriminate.

Le modèle USM d'analyse et de projection de l'économie américaine

René Lalonde
Dans cette étude, l'auteur présente un nouveau modèle de prévision et d'analyse de l'économie américaine (c.-à.-d. le modèle USM) construit à la Banque du Canada. Comparativement au mo-dèle précédent (le VSM), le USM comporte plusieurs avantages. Premièrement, il utilise les nou-velles méthodes d'identification du PIB potentiel basées sur les VAR structurels. Deuxièmement, il permet de mieux prendre en compte les caractéristiques actuelles de l'économie américaine (no-tamment le « boom » de la productivité) et d'endogénéiser...

Risk Perceptions and Attitudes

Miroslav Misina
Changes in risk perception have been used in various contexts to explain shorter-term developments in financial markets, as part of a mechanism that amplifies fluctuations in financial markets, as well as in accounts of "irrational exuberance." This approach holds that changes in risk perception affect actions undertaken in risky situations, and create a discrepancy between the risk attitude implied by those actions and the a priori description of risk attitude as summarized by the Arrow-Pratt...

An Analysis of Closure Policy under Alternative Regulatory Structures

Greg Caldwell
The author develops a theoretical model of bank closure. The regulatory decision about bank failure consists of two parts: whether to close and how to close. Assuming that the closure decision is credible, the welfare implications of two resolution regimes are considered. In one case, a meta-regulator supervises, closes, and resolves failed banks using an ex post efficient criterion. In the other case, a supervisor closes the bank while a deposit insurer resolves the closure...

Labour Market Adjustments to Exchange Rate Fluctuations: Evidence from Canadian Manufacturing Industries

Danny Leung & Terence Yuen
The authors provide some of the first empirical evidence on labour market adjustments to exchange rate movements in Canadian manufacturing industries. Generalized method of moments estimates that control for endogeneity show that there are significant changes in labour input when a change in the exchange rate occurs. During the 1981-97 period, the cumulative effect of a 10 per cent depreciation (appreciation) of the Canadian dollar was a 10 to 12.5 per cent increase (decline) in...

Endogenous Central Bank Credibility in a Small Forward-Looking Model of the U.S. Economy

René Lalonde
The linkages between inflation and the economy's cyclical position are thought to be strongly affected by the credibility of monetary authorities. The author complements existing research by estimating a small forward-looking model of the U.S. economy with endogenous central bank credibility. His work differs from the existing literature in several ways. First, he endogenizes and estimates credibility parameters, allowing inflation expectations to be a mix of backward- and forward-looking agents. Second, his models include both...

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