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ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model

Author

Listed:
  • José Dorich
  • Michael K. Johnston
  • Rhys R. Mendes
  • Stephen Murchison
  • Yang Zhang

Abstract

This report provides a detailed technical description of an updated version of the Terms-of-Trade Economic Model (ToTEM II), which replaced ToTEM (Murchison and Rennison 2006) in June 2011 as the Bank of Canada’s quarterly projection model for Canada. ToTEM has been improved along a number of dimensions, with important changes to the model structure, including: (i) multiple interest rates, (ii) sector-specific demand specifications for consumption, housing investment and inventory investment, (iii) a role for financial wealth in household consumption, and (iv) rule-of-thumb price and wage setters. These new features remove some of the restrictions on model dynamics implied by assumptions in ToTEM, making ToTEM II more general and flexible than its predecessor. Furthermore, most of ToTEM II’s parameters are now formally estimated using full information estimation techniques, leading to significantly improved in-sample goodness of fit. The report discusses the model’s estimation and reviews the most important changes in the model’s properties. Finally, some important applications of ToTEM II in addressing recent policy questions are provided.

Suggested Citation

  • José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    • Handle: RePEc:bca:bocatr:100
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    References listed on IDEAS

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    1. Boris Hofmann & Bilyana Bogdanova, 2012. "Taylor rules and monetary policy: a global "Great Deviation"?," BIS Quarterly Review, Bank for International Settlements, September.
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    3. Brahima Coulibaly & Horacio Sapriza & Andrei Zlate, 2011. "Trade credit and international trade during the 2008-09 global financial crisis," International Finance Discussion Papers 1020, Board of Governors of the Federal Reserve System (U.S.).
    4. Levin, Andrew T. & David López-Salido, J. & Nelson, Edward & Yun, Tack, 2008. "Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(Supplemen), pages 48-62, October.
    5. Erceg, Christopher J. & Henderson, Dale W. & Levin, Andrew T., 2000. "Optimal monetary policy with staggered wage and price contracts," Journal of Monetary Economics, Elsevier, vol. 46(2), pages 281-313, October.
    6. J. M. Culbertson, 1957. "The Term Structure of Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 71(4), pages 485-517.
    7. José Dorich & Rhys R. Mendes & Yang Zhang, 2011. "Introducing Multiple Interest rates in ToTEM," Bank of Canada Review, Bank of Canada, vol. 2011(Summer), pages 3-10.
    8. Robin Greenwood & Dimitri Vayanos, 2014. "Bond Supply and Excess Bond Returns," Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 663-713.
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    11. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
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    More about this item

    Keywords

    Economic models; Business fluctuations and cycles;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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