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Empirical Estimation and the Quarterly Projection Model: An Example Focusing on the External Sector

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Author Info

  • Amano, Robert

    ()
    (Research Department)

  • Coletti , Don

    (Economic Analysis and Forecasting Division)

  • Murchison , Stephen

    (Economic Analysis and Forecasting Division)

Abstract

In this paper, we offer one possible way to estimate a key feature of the Bank of Canada’s main macroeconomic model, the Quarterly Projection Model or QPM. The key feature which is the focus of this study is the so-called "short-run equilibrium values" or SREQs which link the dynamic portion of QPM to its steady state. Our estimation is motivated by an unsatisfying feature of the current version of the SREQs. That is, they are produced using a mechanical filter which does not capture the influence of movements in other variables on the filtered time series. In other words, the current SREQs are exogenous. The estimation approach detailed in this paper attempts to make the SREQs endogenous with respect to fluctuations in key economic variables. The first part of this paper demonstrates how we are able to rewrite the external sector of QPM in a form that allows empirical estimation based on cointegration analysis. The second part of the paper then considers the implications for QPM of estimated, endogenous SREQs via both impulse response functions and stochastic simulations. In this latter part of the paper, we also present what we believe are novel approaches for estimating stochastic shocks for calibrated macroeconomic models.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 104.

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Length: 53 pages
Date of creation: 01 Mar 2000
Date of revision:
Handle: RePEc:hhs:rbnkwp:0104

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Macroeconomic modeling; Quarterly Projection Model;

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References

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  1. Kozicki, Sharon, 1999. "Multivariate detrending under common trend restrictions: Implications for business cycle research," Journal of Economic Dynamics and Control, Elsevier, vol. 23(7), pages 997-1028, June.
  2. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  3. Peter C.B. Phillips & Pierre Perron, 1986. "Testing for a Unit Root in Time Series Regression," Cowles Foundation Discussion Papers 795R, Cowles Foundation for Research in Economics, Yale University, revised Sep 1987.
  4. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  5. Masson, Paul R. & Kremers, Jeroen & Horne, Jocelyn, 1994. "Net foreign assets and international adjustment: The United States, Japan and Germany," Journal of International Money and Finance, Elsevier, vol. 13(1), pages 27-40, February.
  6. Timothy Cogley & James M. Nason, 1993. "Effects of the Hodrick-Prescott filter on trend and difference stationary time series: implications for business cycle research," Working Papers in Applied Economic Theory 93-01, Federal Reserve Bank of San Francisco.
  7. Blanchard, Olivier J, 1985. "Debt, Deficits, and Finite Horizons," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 223-47, April.
  8. Hamid Faruqee, 1994. "Long-Run Determinants of the Real Exchange Rate," IMF Working Papers 94/90, International Monetary Fund.
  9. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
  10. Robert Lafrance & Simon van Norden, 1995. "Exchange rate fundamentals and the Canadian dollar," Bank of Canada Review, Bank of Canada, vol. 1995(Spring), pages 17-33.
  11. Amano, R. A. & van Norden, S., 1998. "Oil prices and the rise and fall of the US real exchange rate," Journal of International Money and Finance, Elsevier, vol. 17(2), pages 299-316, April.
  12. Geweke, John, 1988. "Antithetic acceleration of Monte Carlo integration in Bayesian inference," Journal of Econometrics, Elsevier, vol. 38(1-2), pages 73-89.
  13. Amano, Robert A. & Wirjanto, Tony S., 1997. "Adjustment costs and import demand behavior: evidence from Canada and the United States," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 461-476, June.
  14. McFadden, Daniel, 1989. "A Method of Simulated Moments for Estimation of Discrete Response Models without Numerical Integration," Econometrica, Econometric Society, vol. 57(5), pages 995-1026, September.
  15. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  16. Weil, Philippe, 1989. "Overlapping families of infinitely-lived agents," Journal of Public Economics, Elsevier, vol. 38(2), pages 183-198, March.
  17. Joseph E. Gagnon, 1996. "Net foreign assets and equilibrium exchange rates: panel evidence," International Finance Discussion Papers 574, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Working Papers 02-1, Bank of Canada.

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