Staff Working Papers
Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium FrameworkIn an era when the primary policy instrument is the level of the short-term interest rate, a comparison of that rate with some equilibrium rate can be a useful guide for policy and a convenient method to measure the stance of monetary policy.
Using a closed-economy model, Jensen (2002) and Walsh (2003) have, respectively, shown that a policy regime that optimally targets nominal income growth (NIT) or the change in the output gap (SLT) outperforms a regime that targets inflation, because NIT and SLT induce more inertia in the actions of the central bank, effectively replicating the outcome obtained under precommitment. The author obtains a very different result when the analysis is extended to open-economy models.
One of the central lessons learned from the Great Depression was that adjusting government spending each year to balance the budget increases the volatility of output.
In this report, the authors examine and compare twelve private and public sector models of the Canadian economy with respect to their paradigm, structure, and dynamic properties. These open-economy models can be grouped into two economic paradigms.
In this report, we evaluate several simple monetary policy rules in twelve private and public sector models of the Canadian economy. Our results indicate that none of the simple policy rules we examined is robust to model uncertainty, in that no single rule performs well in all models.
Bank of Canada Review articles
August 18, 2002 The third strategy employed by the Bank when dealing with uncertainty is the consideration of appropriate simple reaction functions or "rules" for the setting of the policy interest rate. Since John Taylor's presentation of his much-discussed rule, research on simple policy rules has exploded. Simple rules have several advantages. In particular, they are easy to construct and communicate and are believed by some to be robust, in the sense of generating good results in a variety of economic models. This article provides an overview of the recent research regarding the usefulness and robustness of simple monetary policy rules, particularly in models of the Canadian economy. It also describes and explains the role of simple rules in the conduct of monetary policy in Canada.