This paper shows how existing band-pass filtering techniques and their extension can be applied to the common current-analysis problem of estimating current trends or cycles.Topics: Econometric and statistical methods; Potential output
In this paper, we measure, with Canadian data, the scope of the revisions to real-time estimates of the output gap generated with several univariate and multivariate techniques. We also make an empirical evaluation of the usefulness of the output gap estimates for predicting inflation.Topics: Potential output
In this paper, we discuss some methodologies for estimating potential output and the output gap that have recently been studied at the Bank of Canada. The assumptions and econometric techniques used by the different methodologies are discussed in turn, and applications to Canadian data are presented.Topics: Potential output
This paper tests between fads and bubbles using a new empirical strategy (based on switching-regression econometrics) for distinguishing between competing asset-pricing models. By extending the Blanchard and Watson (1982) model, we show how stochastic bubbles can lead to regime-switching in stock market returns.Topics: Financial markets
This paper reconsiders several recently published but controversial results about the behaviour of exchange rates. In particular, it explores finite-sample problems in the application of cointegration tests and shows how these may have affected the conclusions of recent research.Topics: Econometric and statistical methods
This paper uses regime-switching econometrics to study stock market crashes and to explore the ability of two very different economic explanations to account for historical crashes. The first explanation is based on historical accounts of "manias and panics."Topics: Financial markets
Work on testing for bubbles has caused much debate, much of which has focussed on methodology. Monte Carlo simulations reported in Evans (1991) showed that standard tests for unit roots and cointegration frequently reject the presence of bubbles even when such bubbles are present by construction. Evans referred to this problem as the pitfall of testing for bubbles.Topics: Econometric and statistical methods
Several recent papers have presented evidence from foreign exchange and other markets suggesting that the log of excess returns can be characterized as first-order integrated processes (I(1)). This contrasts sharply with the "conventional" wisdom that log prices are integrated of order one I(1) and that log returns should therefore be integrated of order zero I(0), and even more sharply with the view that past returns have no ability to predict future returns (weak market efficiency).Topics: Econometric and statistical methods
Greater intervention by the public sector is often proposed as a solution to the increased speculation and excessive price volatility thought to characterize today's competitive world financial system.Topics: Exchange rates
This paper is a user's guide to a set of Gauss procedures developed at the Bank of Canada for estimating regime-switching models.Topics: Econometric and statistical methods
This paper derives analytical gradients for a broad class of regime-switching models with Markovian state-transition probabilities. Such models are usually estimated by maximum likelihood methods, which require the derivatives of the likelihood function with respect to the parameter vector. These gradients are usually calculated by means of numerical techniques. The paper shows that analytical gradients [...]Topics: Exchange rates
This paper derives analytical gradients for a broad class of regime-switching models with Markovian state-transition probabilities. Such models are usually estimated by maximum likelihood methods, which require the derivatives of the likelihood function with respect to the parameter vector. These gradients are usually calculated by means of numerical techniques. The paper shows that analytical gradients [...]Topics: Econometric and statistical methods
Views in the economic literature on the main factors that influence exchange rates have evolved over time in response to economic developments and new trends in economic theory. This article provides a brief interpretative survey of the main theories of exchange rate determination.
The factors that influence exchange rate developments are varied and complex. However, the authors show that the broad movements of the Canada-U.S. real exchange rate since the early 1970s can be captured by a simple equation that highlights the role of commodity prices and Canada-U.S. interest rate differentials.
The equation is used to interpret the evolution of the real exchange rate over the last two decades. At times, the real exchange rate deviates significantly from what the equation would predict. One explanation is that the equation omits certain factors that can influence the exchange rate, particularly in the short run. These may include fiscal policy variables, international indebtedness, political uncertainty, and investor sentiments—factors that are difficult to quantify but that have been particularly relevant in recent years.Topics: Exchange rates