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A Comparison of Twelve Macroeconomic Models of the Canadian Economy

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  • Denise Côté
  • John Kuszczak
  • Jean-Paul Lam
  • Ying Liu
  • Pierre St-Amant

Abstract

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. The first is the "conventional" paradigm (or Phillips curve paradigm) and the second is the "money matters" paradigm. Under the conventional paradigm, inflation is determined by price adjustments in response to inflation expectations and by factor disequilibrium in labour or product markets. Under the money matters paradigm, inflation is determined mainly by monetary disequilibrium. Although most models are based on the conventional paradigm, there are nevertheless important differences within that paradigm. In particular, there are differences in the inflation process (linear/non-linear Phillips curve), the expectation processes (backward-looking and/or model-consistent expectations), the channels through which monetary policy affects the economy (short-term interest rates or the yield curve), and the sensitivity of output and inflation to changes in interest rates and the exchange rate. The authors also examine the dynamic properties of the various models when those models use the simple monetary reaction function proposed by Taylor (1993). The eight deterministic shocks considered in this report reveal significant differences in the dynamic properties of the participating models. A comparison of the models' impulse-response functions with those of a vector autoregression suggests that some models do better than others in reflecting the typical response of the Canadian economy to certain shocks.

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Bibliographic Info

Paper provided by Bank of Canada in its series Technical Reports with number 94.

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Length: 75pages
Date of creation: 2003
Date of revision:
Handle: RePEc:bca:bocatr:94

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Keywords: Economic models; Uncertainty and monetary policy;

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References

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Cited by:
  1. Scott Hendry & Wai-Ming Ho & Kevin Moran, 2003. "Simple Monetary Policy Rules in an Open-Economy, Limited-Participation Model," Working Papers 03-38, Bank of Canada.
  2. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2003. "A Comparison of Twelve Macroeconomic Models of the Canadian Economy," Technical Reports 94, Bank of Canada.
  3. Michael Parkin, 2009. "What is the Ideal Monetary Policy Regime? Improving the Bank of Canada's Inflation-targeting Program," C.D. Howe Institute Commentary, C.D. Howe Institute, issue 279, January.

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