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Regime-switching monetary policy in Canada

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  • Lange, Ronald H.
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    Abstract

    This study captures regime-switching, monetary policy responses to financial market disturbances in Canada. Monetary policy is identified within a nonlinear, structural VAR framework with a regime-switching policy block that allows for contemporaneous policy reactions in a small open economy. The key finding is that monetary policy in Canada has undergone important changes in monetary policy regimes since the early 1970s that correspond to changes in operating procedures and medium-term inflation targets. Overall, the Bank of Canada is found to use a "hybrid" operating procedure in different monetary policy regimes, where it sets a monetary policy rate, while "leaning against the wind" to smooth exchange-rate fluctuations and to offset unexpected increases in long-term yields in order to maintain monetary conditions. Although the magnitude of the contemporaneous monetary policy responses are regime-dependent, the transmission of the responses through financial markets are regime independent. The study also constructs regime-switching measures of the overall level and relative volatility of monetary conditions that captures both the endogenous and exogenous components of the monetary policy response function.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 3 (September)
    Pages: 782-796

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:3:p:782-796

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    Web page: http://www.elsevier.com/locate/inca/622617

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    Keywords: Monetary policy Regime-switching Structural VAR Small open economy;

    References

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    Citations

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    Cited by:
    1. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    2. Tomas Havranek & Marek Rusnak, 2012. "Transmission Lags of Monetary Policy: A Meta-Analysis," Working Papers 2012/10, Czech National Bank, Research Department.
    3. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
    4. FIodendji, Komlan, 2011. "Should Canadian monetary policy respond to asset prices? Evidence from a structural model," MPRA Paper 28039, University Library of Munich, Germany, revised 10 Jan 2011.
    5. Fiodendji, Komlan, 2011. "Should Canadian Monetary Policy Respond to Asset Prices? Evidence from a Structural Model," MPRA Paper 27942, University Library of Munich, Germany.
    6. Daniel Komlan Fiodendji, 2012. "Should Canadian Monetary Policy Respond to Asset Prices? Evidence from a Structural Model," Working Papers 1209E, University of Ottawa, Department of Economics.

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