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Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada

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  • Julien Champagne
  • Rodrigo Sekkel

Abstract

We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show that it is crucial to take into account the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991 when estimating the effects of monetary policy. For instance, we find that a 100-basis-point increase in our new shock series leads to a 1.0 per cent decrease in real GDP and a 0.4 per cent fall in the price level, while not accounting for the break leads to a permanent decrease in real GDP and a price puzzle. Finally, we compare our results with updated narrative evidence for the U.S. and the U.K. and argue that taking into account changes in the conduct of monetary policy in these countries also yields significantly different effects of monetary policy.

Suggested Citation

  • Julien Champagne & Rodrigo Sekkel, 2017. "Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada," Staff Working Papers 17-39, Bank of Canada.
  • Handle: RePEc:bca:bocawp:17-39
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    Cited by:

    1. Olivier Gervais, 2019. "How Oil Supply Shocks Affect the Global Economy: Evidence from Local Projections," Discussion Papers 2019-6, Bank of Canada.
    2. Barnichon, Regis & Mesters, Geert, 2021. "The Phillips multiplier," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 689-705.
    3. Murgia, Lucia M., 2020. "The effect of monetary policy shocks on macroeconomic variables: Evidence from the Eurozone," Economics Letters, Elsevier, vol. 186(C).
    4. Shutao Cao & Wei Dong, 2019. "Production Networks and the Propagation of Commodity Price Shocks," 2019 Meeting Papers 612, Society for Economic Dynamics.
    5. Cantore, Cristiano & Ferroni, Filippo & León-Ledesma, Miguel A., 2018. "The missing link: monetary policy and the labor share," LSE Research Online Documents on Economics 90873, London School of Economics and Political Science, LSE Library.
    6. Thomas J Carter & Rhys Mendes & Lawrence L Schembri, 2018. "Credibility, Flexibility and Renewal: The Evolution of Inflation Targeting in Canada," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    7. Jeremy Kronick & Steve Ambler, 2019. "Do demographics affect monetary policy transmission in Canada?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 24(2), pages 787-811, April.
    8. Baranowski, Paweł & Doryń, Wirginia & Łyziak, Tomasz & Stanisławska, Ewa, 2021. "Words and deeds in managing expectations: Empirical evidence from an inflation targeting economy," Economic Modelling, Elsevier, vol. 95(C), pages 49-67.
    9. Philippe Goulet Coulombe, 2020. "The Macroeconomy as a Random Forest," Papers 2006.12724, arXiv.org, revised Mar 2021.
    10. Stefan Laséen & Andrea Pescatori, 2020. "Financial stability and interest‐rate policy: A quantitative assessment of costs and benefit," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 53(3), pages 1246-1273, August.
    11. Philippe Goulet Coulombe, 2020. "Time-Varying Parameters as Ridge Regressions," Papers 2009.00401, arXiv.org, revised Mar 2021.
    12. Tony Chernis & Corinne Luu, 2018. "Disaggregating Household Sensitivity to Monetary Policy by Expenditure Category," Staff Analytical Notes 2018-32, Bank of Canada.
    13. Monica Jain & Christopher S. Sutherland, 2020. "How Do Central Bank Projections and Forward Guidance Influence Private-Sector Forecasts?," International Journal of Central Banking, International Journal of Central Banking, vol. 16(5), pages 179-218, October.
    14. Julien Champagne & Guillaume Poulin-Bellisle & Rodrigo Sekkel, 2018. "Evaluating the Bank of Canada Staff Economic Projections Using a New Database of Real-Time Data and Forecasts," Staff Working Papers 18-52, Bank of Canada.
    15. Kronick, Jeremy M. & Villarreal, Francisco G., 2019. "Distributional impacts of low for long interest rates," Estudios y Perspectivas – Sede Subregional de la CEPAL en México 180, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    16. Matthieu Verstraete & Lena Suchanek, 2018. "Understanding Monetary Policy and its Effects: Evidence from Canadian Firms Using the Business Outlook Survey," CESifo Working Paper Series 7221, CESifo.

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    More about this item

    Keywords

    Business fluctuations and cycles; Central bank research; Econometric and statistical methods; Exchange rate regimes; Inflation and prices; Inflation targets; Interest rates; Monetary Policy; Monetary policy framework;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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