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An Optimized Monetary Policy Rule for ToTEM

  • Jean-Philippe Cayen
  • Amy Corbett
  • Patrick Perrier
Registered author(s):

    The authors propose a monetary policy rule for the Terms-of-Trade Economic Model (ToTEM), the Bank of Canada's new projection and policy-analysis model for the Canadian economy. They consider simple instrument rules such as Taylor-type and inflation-forecast-based rules. The proposed rule minimizes a loss function that reflects the assumed preferences of the monetary authority over inflation and output, as well as over the variability of its instrument. The authors also investigate how robust the proposed rule is with respect to a particular realization of shocks that differs from the historical distribution used to find the optimized rule.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-41.pdf
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    Paper provided by Bank of Canada in its series Staff Working Papers with number 06-41.

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    Length: 34 pages
    Date of creation: 2006
    Date of revision:
    Handle: RePEc:bca:bocawp:06-41
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    234 Wellington Street, Ottawa, Ontario, K1A 0G9, Canada

    Phone: 613 782-8845
    Fax: 613 782-8874
    Web page: http://www.bank-banque-canada.ca/

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    1. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
    2. Don Coletti & Jack Selody & Carolyn Wilkins, 2006. "Another Look at the Inflation-Target Horizon," Bank of Canada Review, Bank of Canada, vol. 2006(Summer), pages 31-37.
    3. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
    4. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    5. Svensson, L.E.O., 1998. "Inflation Targeting as a Monetary Policy Rule," Papers 646, Stockholm - International Economic Studies.
    6. Nicoletta Batini & Edward Nelson, 1999. "Optimal Horizons for Inflation Targeting," Computing in Economics and Finance 1999 1052, Society for Computational Economics.
    7. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen.
    8. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202 National Bureau of Economic Research, Inc.
    9. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    10. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
    11. Paul Fenton & Stephen Murchison, 2006. "ToTEM: The Bank of Canada's New Projection and Policy-Analysis Model," Bank of Canada Review, Bank of Canada, vol. 2006(Autumn), pages 5-18.
    12. Robert Amano & Don Coletti & Tiff Macklem, 1998. "Monetary rules when economic behaviour changes," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    13. Smets, Frank, 2003. "Maintaining price stability: how long is the medium term?," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1293-1309, September.
    14. Jamie Armour & Ben Fung & Dinah Maclean, 2002. "Taylor Rules in the Quarterly Projection Model," Staff Working Papers 02-1, Bank of Canada.
    15. Coletti, D. & Hunt, B. & Rose, D. & Tetlow, R., 1996. "The Bank of Canada's New Quarterly Projection Model. Part 3 , the Dynamic Model : QPM," Technical Reports 75, Bank of Canada.
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