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We propose alternative single-equation semi-structural models for forecasting inflation in Canada, whereby structural New Keynesian models are combined with time-series features in the data. Several marginal cost measures are used, including one that in addition to unit labour cost also integrates relative price shocks known to play an important role in open-economies.
: Econometric and statistical methods; Inflation and pricesInflation-targeting central banks around the world often state their inflation objectives with regard to the consumer price index (CPI). Yet the literature on optimal monetary policy based on models with nominal rigidities and more than one sector suggests that CPI inflation is not always the best choice from a social welfare perspective.
: Inflation and prices; Inflation targets; Inflation: costs and benefits; Monetary policy framework; Monetary policy implementationReal wage rigidities have recently been proposed as a way of building intrinsic persistence in inflation within the context of New Keynesian Phillips Curves. Using two recent illustrative structural models, we evaluate empirically the importance of real wage rigidities in the data and the extent to which such models provide useful information regarding price stickiness.
: Econometric and statistical methods; Inflation and prices; Labour marketsWeak identification is likely to be prevalent in multi-equation macroeconomic models such as in dynamic stochastic general equilibrium setups. Identification difficulties cause the breakdown of standard asymptotic procedures, making inference unreliable.
: Econometric and statistical methods; Inflation and pricesUsing identification-robust methods, the authors estimate and evaluate for Canada and the United States various classes of inflation equations based on generalized structural Calvo-type models. The models allow for different forms of frictions and vary in their assumptions regarding the type of price indexation adopted by firms. Point and confidence-set parameter estimates are obtained based [...]
: Econometric and statistical methods; Inflation and pricesWe assess the implications of price indexation for estimated frequency of price adjustment in sticky price models of business cycles. These models predominantly assume that non-reoptimized prices are indexed to lagged or average inflation.
: Econometric and statistical methods; Economic models; Inflation and pricesFluctuations in the prices of various natural resource products are of concern in both policy and business circles; hence, it is important to develop accurate price forecasts.
: Econometric and statistical methodsThe authors address empirically the implications of structural breaks in the variance-covariance matrix of inflation and import prices for changes in pass-through.
: Econometric and statistical methodsThe authors use identification-robust methods to assess the empirical adequacy of a New Keynesian Phillips curve (NKPC) equation.
: Econometric and statistical methods; Inflation and pricesThe authors present an empirical model to forecast short-run inventory investment behaviour for Canada.
: Domestic demand and components; Econometric and statistical methodsThe authors use simple new finite-sample methods to test the empirical relevance of the New Keynesian Phillips curve (NKPC) equation.
: Econometric and statistical methods; Inflation and pricesThe authors test the statistical significance of Pindyck's (1999) suggested class of econometric equations that model the behaviour of long-run real energy prices.
: Econometric and statistical methodsPostulating two different specifications for the Canadian Phillips curve (a purely backwardlooking model, and a partly backward-, partly forward-looking model), the authors test for structural breaks in the parameters of the equation. In each case, they account for the possibilities that: (i) breaks can be discrete, or continuous, and (ii) available data samples may be too small to justify using asymptotically valid structural-change tests.
: Econometric and statistical methodsThe authors develop a new methodology to investigate how crises cause the relationship between financial variables to change. Two possible sources of increased co-movement between markets during high-variance episodes are considered: larger common shocks operating through standard market linkages, and a structural change in the propagation of shocks between markets, called "shift contagion."
: Econometric and statistical methods; Financial marketsThis paper empirically investigates the possibility that the effects of shocks to output depend on the level of inflation. The analysis extends Elwood's (1998) framework by incorporating in the model an inflation-threshold process that can potentially influence the stochastic properties of output.
: Econometric and statistical methods; Inflation: costs and benefitsThis paper empirically determines why, during the 1990s, inflation in Canada was consistently more stable than predicted by the fixed-coefficients Phillips curve. A time-varying-coefficient model, where all the parameters adjust simultaneously, shows that the behaviour of expectations was probably a major contributing factor.
: Business fluctuations and cycles; Econometric and statistical methods; Inflation and pricesThe observed predictability of excess returns in equity and foreign exchange markets has largely been attributed to the presence of time-varying risk premiums in these markets. For example, excess equity returns were found to be explained by various financial and economic variables. Similarly, in the foreign exchange market, the forward rate was found not to [...]
: Exchange rates; Financial markets; Market structure and pricingPricing-to-market (PTM) theory suggests that monopolistic firms which export adjust their destination-specific markups in reaction to exchange rate shocks. These adjustments limit changes in the price of their exports. Thus, important movements in the bilateral nominal exchange rate between two countries that trade are not necessarily fully reflected in the price of imports. Evidence in [...]
: Econometric and statistical methods; Market structure and pricingState-space models have long been popular in explaining the evolution of various economic variables. This is mainly because they generally have more economic content than do others in their class of parsimonious models (for example, VARs). Yet, in spite of their advantages, use of these models until recently was limited by the assumption that all [...]
: Econometric and statistical methodsIn this paper we measure potential output (and consequently the output gap) using state-space models. Given that the estimated output gap is used as an indicator to measure the extent of inflationary pressures in the economy, we evaluate the use of such models for the implementation of monetary policy. Our starting point is the Gerlach [...]
: Potential output