Responses of Various Econometric Models to Selected Policy Shocks

In July, 1982 a seminar was held in Ottawa to compare the responses of nine major econometric models to a previously specified set of shocks to the Canadian economy. At the seminar, which was sponsored by the Bank of Canada and the Department of Finance, participants presented the results of their simulations and discussed the reasons for differences among their projections. The simulations chosen were relatively standard because different types of models were involved and because modellers had to provide their own resources.

The monetary policy shocks entailed two reductions in short-term interest rates (100 and 500 basis points), a 1 per cent reduction in the level of the money supply, and a 1 percentage point reduction in the growth of money. The fiscal policy shocks embodied two government non-wage expenditure shocks ($1 and $5 billion in 1982), a personal income tax cut ($1 billion in 1982 adjusted over time to proxy a reduction in federal personal income tax rates), and a corporate income tax reduction ($1 billion in 1982 modelled as reduction in federal corporate tax rates) and were done under the assumption of a non-accommodating monetary policy. The two exchange rate shocks involved simulating a 10 per cent permanent depreciation of the Canadian dollar, one via lower domestic interest rates and expanding money supply, the other under the assumption of an exogenous shock but with the exchange rate remaining endogenous.

To give readers an overview of the conference as a whole, this report provides cross-model comparisons of all the simulation results and summarizes the discussion sessions. Introductory remarks and the list of participants in the seminar are provided in appendixes.

Content Type(s): Staff research, Technical reports
Topic(s): Economic models
JEL Code(s): C, C5, C52, E, E1, E17