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

Author

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  • Nicholas Rowe
  • James Yetman

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

  • Nicholas Rowe & James Yetman, 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
    DOI: 10.34989/swp-2000-11
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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. Leo Butler, 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. Richard H. Clarida & Jordi Gali & Mark Gertler, 1998. "Monetary policy rules in practice," Proceedings, Federal Reserve Bank of San Francisco, issue mar.
    4. 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.
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    Cited by:

    1. Alan Bollard & Claudio Borio & Pierre Duguay & Glenn Stevens, 2004. "Wrap-up Discussion," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Simon Guttmann (ed.),The Future of Inflation Targeting, Reserve Bank of Australia.
    2. Jamie Armour, 2006. "An Evaluation of Core Inflation Measures," Staff Working Papers 06-10, Bank of Canada.
    3. Seamus Hogan & Marianne Johnson & Thérèse Laflèche, 2001. "Core Inflation," Technical Reports 89, Bank of Canada.
    4. JOHANSSON, Anders C., 2009. "Is U.S. money causing China's output?," China Economic Review, Elsevier, vol. 20(4), pages 732-741, December.
    5. Robert Amano & Kim McPhail & Hope Pioro & Andrew Rennison, 2002. "Evaluating the Quarterly Projection Model: A Preliminary Investigation," Staff Working Papers 02-20, Bank of Canada.
    6. 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.

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    Keywords

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    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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