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Identifying Policy-makers' Objectives: An Application to the Bank of Canada

Author

Listed:
  • Rowe, Nicholas
  • Yetman, James

Abstract

In this paper, we develop a new way to test hypotheses about policy-makers' targets, and we implement that test for Canadian monetary policy. If, for example, the Bank of Canada is using interest rates to target an inflation rate of 2 per cent and there is an 8-quarter lag in the effect of the interest rate on inflation, then deviations of inflation from 2 per cent should be unforecastable and uncorrelated with any information in the Bank of Canada's information set lagged by 8 quarters. This would imply that empirical causality tests of monetary policy on inflation could be very misleading. Our test indicates that there was indeed a major change in the Bank of Canada's objectives about the time when formal inflation targets were announced.

Suggested Citation

  • Rowe, Nicholas & Yetman, James, 2000. "Identifying Policy-makers' Objectives: An Application to the Bank of Canada," Staff Working Papers 00-11, Bank of Canada.
  • Handle: RePEc:bca:bocawp:00-11
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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/01/wp00-11.pdf
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    References listed on IDEAS

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    1. Hall, Robert E, 1978. "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 971-987, December.
    2. Butler, L, 1996. "The Bank of Canada's New Quarterly Porjection Model Part 4 : A Semi- Structural Method to Estimate Potential Output : Combining Economic Theory with a Time-Series Filter," Technical Reports 77, Bank of Canada.
    3. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    4. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
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    Cited by:

    1. Rodriguez, Gabriel & Rowe, Nicholas, 2007. "Why U.S. money does not cause U.S. output, but does cause Hong Kong output," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1174-1186, November.
    2. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    3. Robert Amano1 & Kim McPhail & Hope Pioro & Andrew Rennison, 2002. "Evaluating the Quarterly Projection Model: A Preliminary Investigation," Staff Working Papers 02-20, Bank of Canada.
    4. Hogan, Seamus & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    5. Alan Bollard & Claudio Borio & Pierre Duguay & Glenn Stevens, 2004. "Wrap-up Discussion," RBA Annual Conference Volume,in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.

    More about this item

    Keywords

    Inflation Targets;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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