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  • October 20, 2006

    MUSE: The Bank of Canada's New Projection Model of the U.S. Economy

    Bank of Canada Review - Autumn 2006 Marc-André Gosselin, René Lalonde, Nicolas Parent
    Staff projections provided for the Bank of Canada's monetary policy decision process take into account the integration of Canada's very open economy within the global economy, as well as its close real and financial linkages with the United States. To provide inputs for this projection, the Bank has developed several models, including MUSE, NEUQ (the New European Quarterly Model), and BoC-GEM (Bank of Canada Global Economy Model), to analyze and forecast economic developments in the rest of the world. The authors focus on MUSE, the model currently used to describe interaction among the principal U.S. economic variables, including gross domestic product, inflation, interest rates, and the exchange rate. Brief descriptions are also provided of NEUQ and BoC-GEM.
    Content Type(s): Publications, Bank of Canada Review articles
  • October 8, 2006

    Modelling Financial Channels for Monetary Policy Analysis

    Bank of Canada Review - Autumn 2006 Ian Christensen, Ben Fung, Césaire Meh
    The Bank of Canada considers a wide range of information and analysis before making a monetary policy decision and uses carefully articulated models to produce economic projections and to examine alternative scenarios. This article describes an ongoing research agenda at the Bank to develop models in which financial variables play an active role in the transmission of monetary policy actions to economic activity. Such models can help to analyze information from the financial side of the economy and to provide an overall view of the implications of financial developments for the current economic outlook. The authors also explain how this research can help address other issues relevant to the objectives of monetary policy, including how asset-price movements should be taken into account in the monetary policy framework.
    Content Type(s): Publications, Bank of Canada Review articles
  • June 21, 2006

    Credibility with Flexibility: The Evolution of Inflation-Targeting Regimes, 1990–2006

    Bank of Canada Review - Summer 2006 Graydon Paulin
    Beginning with a review of the adoption of inflation targeting in a broad group of countries, Paulin focuses on changes in the design of inflation-targeting frameworks in light of fifteen years of accumulated experience. Included in the discussion are the use of numerical targets and ranges, the policy horizon, supporting institutional policy structures, and communication, including the publication of forecasts. A recurring theme is how much flexibility an inflation-targeting regime allows. The article concludes that the changes made to the frameworks have been relatively modest since their adoption, but in concert with the improved credibility that has resulted from central banks meeting their inflation-control targets, they have allowed an increasingly nuanced response to economic shocks.
    Content Type(s): Publications, Bank of Canada Review articles
  • June 11, 2006

    Evaluating Measures of Core Inflation

    Bank of Canada Review - Summer 2006 Thérèse Laflèche, Jamie Armour
    Since the Bank of Canada adopted inflation targeting in 1991, it has focused on a measure of core inflation as a shorter-term guide for monetary policy. When the targets were renewed in 2001, the Bank adopted CPIX as its measure of core inflation because of the advantages it offered. Leflèche and Armour review the experience with CPIX and whether the criteria used to select it in 2001 still favour the measure today. They describe the various measures of core inflation monitored by the Bank and evaluate them on the basis of the volatility of the components, the volatility of the core measures themselves, absence of bias relative to total CPI, predictive power, and certain practical criteria, including timeliness and credibility. They conclude that CPIX still satisfies all the empirical and practical criteria.
    Content Type(s): Publications, Bank of Canada Review articles
  • June 2, 2006

    Another Look at the Inflation-Target Horizon

    Bank of Canada Review - Summer 2006 Donald Coletti, Jack Selody, Carolyn A. Wilkins
    The conduct of monetary policy within an inflation-targeting framework requires the establishment of an inflation-target horizon, which is the average time it takes inflation to return to the target. Policy-makers have an interest in communicating this horizon, since it is likely to help anchor inflation expectations. This article focuses on the determination of the appropriate policy horizon by reporting on two recent Bank of Canada studies. The evidence suggests that the current target horizon of six to eight quarters remains appropriate. It is important to note that the duration of the optimal inflation-target horizon varies widely, depending on the combination of shocks to the economy. In rare cases when the financial accelerator is triggered by a persistent shock, such as an asset-price bubble, it may be appropriate to take a longer view of the inflation-target horizon.
    Content Type(s): Publications, Bank of Canada Review articles
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