An Up-to-Date and Improved BVAR Model of the Canadian Economy

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In this paper, we estimate a fully optimized BVAR model of the Canadian economy for the period 1971-87. The model is well-adapted to the features of a small open economy. We show how it can be used as an input in the monetary policy process either as a forecasting instrument or an analytical tool. In general, forecast results over the 1988-92 period compare well with those of univariate autoregressive models. The results from the variance decomposition exercise show a rather weak influence of monetary aggregates on macroeconomic variables, at least in a short-run context. However, foreign variables, particularly commodity prices, play an important role.