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Canadian Monetary Policy Analysis using a Structural VARMA Model

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  • Mala Raghavan

    ()

  • George Athanasopoulos

    ()

  • Param Silvapulle

    ()

Abstract

This paper builds a structural VARMA (SVARMA) model for investigating Canadian monetary policy. Despite the support for a VARMA model for monetary policy analysis, the traditional VAR and SVAR models have predominantly been used in the literature mainly due to difficulties associated with the identification and estimation of such a model. Using the scalar component model (SCM) proposed by Athanasopoulos and Vahid (2008a), this paper first identifies a VARMA model and then constructs a SVARMA model for Canadian monetary policy. We included the SVAR model in our study for a comparison purpose. Relative to this model, the impulse responses generated by the SVARMA model appear to be consistent with those predicted by various economic theoretical models, and solves the economic puzzles found commonly in the empirical literature on monetary policy. The successful construction and implementation of the SVARMA model for Canadian monetary policy analysis along with its promising impulse responses, indicate the suitability of this framework for small open economies.

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Bibliographic Info

Paper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 4/13.

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Date of creation: 2013
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Handle: RePEc:msh:ebswps:2013-4

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Keywords: VARMA models; Identification; Impulse responses; Open economy; Transmission mechanism;

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References

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  1. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
  2. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  3. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  4. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
  5. Andrea Brischetto & Graham Voss, 1999. "A Structural Vector Autoregression Model of Monetary Policy in Australia," RBA Research Discussion Papers rdp1999-11, Reserve Bank of Australia.
  6. Alasdair Scott & George Kapetanios & Adrian Pagan, 2005. "Making a match: combining theory and evidence in policy-oriented macroeconomic modelling," Computing in Economics and Finance 2005 462, Society for Computational Economics.
  7. George Athanasopoulos & Farshid Vahid, 2006. "VARMA versus VAR for Macroeconomic Forecasting," Monash Econometrics and Business Statistics Working Papers 4/06, Monash University, Department of Econometrics and Business Statistics.
  8. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  9. Maravall, Agustin, 1993. "Stochastic linear trends : Models and estimators," Journal of Econometrics, Elsevier, vol. 56(1-2), pages 5-37, March.
  10. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  11. Wallis, Kenneth F, 1977. "Multiple Time Series Analysis and the Final Form of Econometric Models," Econometrica, Econometric Society, vol. 45(6), pages 1481-97, September.
  12. George Athanasopoulos & Farshid Vahid, 2006. "A Complete VARMA Modelling Methodology Based on Scalar Components," Monash Econometrics and Business Statistics Working Papers 2/06, Monash University, Department of Econometrics and Business Statistics.
  13. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
  14. Zellner, Arnold & Palm, Franz, 1974. "Time series analysis and simultaneous equation econometric models," Journal of Econometrics, Elsevier, vol. 2(1), pages 17-54, May.
  15. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  16. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
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