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

  • Rowe, Nicholas
  • Yetman, James

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.

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File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/01/wp00-11.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 00-11.

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Length: 29 pages
Date of creation: 2000
Date of revision:
Handle: RePEc:bca:bocawp:00-11
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