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The Canadian Economic and Fiscal Model - 1996 Version: Part 2 - Dynamic Forecasting and Simulation Properties

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  • Alain DeSerres
  • Benoît Robidoux
  • Bing-Sun Wong

Abstract

The Canadian Economic and Fiscal Model (CEFM) is used by the Department of Finance to forecast key economic and fiscal indicators as well as to simulate the economic and fiscal effects of policy or economic changes. This paper documents the dynamic forecasting and simulation properties of the 1996 version of this model, CEFM96. A detailed description of the theoretical structure and empirical specification of the model can be found in two companion papers. The paper examines the ability of CEFM96 to forecast economic and fiscal data by performing a zero-add dynamic out-of-sample forecast over the 1990-1994 period. This allows us to evaluate the ability of the model to track an economic cycle that includes a major economic downturn as well as an unusually weak economic recovery. The results indicate that, in the very short run, the model correctly forecasts both the beginning and the length of the recession. The model predicts, however, a shallower recession and a much stronger recovery in 1992, but it tracks actual GDP growth in 1993 and 1994 rather well. A simple decomposition analysis indicates that most of the forecast error observed in 1991 and 1992 can be attributed to unexpected structural changes in import and investment functions. By contrast, the model reproduces quite precisely the inflation profile observed over the 1990-1994 period, as the underprediction of excess supply is compensated for by an underprediction of the extent of the depreciation of the Canadian dollar. The paper also describes the responses of CEFM96 to simulated economic and policy shocks. The shocks discussed fall into three broad categories: (1) fiscal policy shocks, (2) monetary and financial market shocks, and (3) external and productivity shocks. The analysis shows that the model has sound dynamic properties in the short run as well as in the long run. The model is not converging to an explicit steady-state solution in response to permanent shocks, but it tends towards a new long-term equilibrium in a cyclical fashion. Overall, CEFM96 appears to be a valid and useful tool for forecasting as well as for economic and policy analysis. Le Modèle Économique et Fiscal Canadien (MEFC) est utilisé par le Ministère des Finances pour prévoir des indicateurs économiques et fiscaux clés, ainsi que pour simuler l'impact économique et fiscal de changements économiques ou de politiques. Ce rapport documente les propriétés de prévision et de simulation dynamiques de la version 1996 de ce modèle, MEFC 96. Une description détaillée de la structure théorique et de la spécification empirique du modèle est présenté dans deux autres rapports. Ce rapport examine, dans un premier temps, la capacité de MEFC96 à prévoir la conjoncture économique et fiscale à l'aide d'une prévision dynamique hors échantillon et sans intrants discrétionnaires au cours de la période 1990-1994. Cet exercice permet d'évaluer la capacité du modèle à reproduire un cycle économique qui inclut une récession majeure et une reprise économique particulièrement lente. Les résultats indiquent qu'à très court terme le modèle prédit bien le début et la longueur de la récession. Par la suite, le modèle prédit cependant une récession moins importante et une reprise économique plus vigoureuse, mais prédit assez précisément la croissance économique observée en 1993 et 1994. Une simple analyse de décomposition montre que la majeure partie de l'erreur de prévision en 1991 et 1992 résulte de changements structuraux imprévisibles dans les fonctions d'importation et d'investissement. Par ailleurs, le modèle reproduit assez précisément le profil d'inflation observé entre 1990 et 1994. Au cours de cette période, la sous prédiction de l'offre excédentaire est compensée par une sous prédiction de l'étendue de la dépréciation du dollar canadien. Ce rapport décrit dans un deuxième temps l'impact dans MEFC96 de différentes simulations de chocs économiques et de politiques. Trois catégories de chocs sont présentés: (1) des chocs de politique fiscale; (2) des chocs monétaires et financiers; (3) des chocs externes et de productivité. L'analyse montre que le modèle a des propriétés dynamiques valables à court terme aussi bien qu'à long terme. Le modèle ne converge vers un état stable en réponse à un choc permanent, mais il tend vers un nouvel équilibre de long terme d'une façon cyclique. Globalement, MEFC96 se révèle être un outil valide et utile pour la prévision et l'analyse de politiques.

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Bibliographic Info

Paper provided by Department of Finance Canada in its series Working Papers-Department of Finance Canada with number 1998-06.

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Handle: RePEc:fca:wpfnca:1998-06

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