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The Monetary Policy Transmission Mechanism and Policy Rules in Canada

  • David Longworth
  • Brian O’Reilly

The inflation-targeting regime in place in Canada requires a clear understanding of the monetary policy transmission mechanism and a way to exploit knowledge of that mechanism in taking policy decisions. This paper discusses the Bank of Canada’s current view of the monetary policy transmission mechanism in Canada and the internal research on which it is based, as well as some of the Bank’s research on policy rules. The main objectives in the research on various elements of the monetary policy framework at the Bank of Canada is to find practical ways of addressing the major types of uncertainty in formulating monetary policy. Uncertainty has become particularly important as a research and practical issue in recent years with the shift in focus to how to conduct monetary policy in a low and stable inflation environment. The concluding section outlines three steps that experience and research has led staff at the Bank of Canada to identify as helpful to policy makers in dealing with uncertainty and providing a sharper focus to discussions at key meetings on monetary policy.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 72.

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Date of creation: May 2000
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Handle: RePEc:chb:bcchwp:72
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  1. St-Amant, P. & van Norden, S., 1997. "Measurement of the Output Gap: A Discussion of Recent Research at the Bank of Canada," Technical Reports 79, Bank of Canada.
  2. Svensson, Lars E. O., 1998. "Inflation targeting as a monetary policy rule," CFS Working Paper Series 1998/16, Center for Financial Studies (CFS).
  3. Eika, K.H. & Ericsson, N.R. & Nymoen, R., 1996. "Hazards in Implementing a Monetary Conditions Index," Memorandum 32/1996, Oslo University, Department of Economics.
  4. Scott Hendry, 1995. "Long-Run Demand for M1," Macroeconomics 9511001, EconWPA.
  5. Seamus Hogan, 1997. "What Does Downward Nominal-Wage Rigidity Imply for Monetary Policy?," Working Papers 97-13, Bank of Canada.
  6. S. Hendry & G-J. Zhang, 1999. "Liquidity Effects and Market Frictions," DNB Staff Reports (discontinued) 29, Netherlands Central Bank.
  7. Pierre Duguay & Stephen Poloz, 1994. "The Role of Economic Projections in Canadian Monetary Policy Formulation," Canadian Public Policy, University of Toronto Press, vol. 20(2), pages 189-199, June.
  8. Svensson, L-E-O, 1997. "Inflation Targeting : Some Extensions," Papers 625, Stockholm - International Economic Studies.
  9. Armour, J. & Atta-Mensah, J. & Engert, W. & Hendry, S., 1996. "A Distant-Early-Warning Model of Inflation Based on M1 Disequilibria," Working Papers 96-5, Bank of Canada.
  10. David R. Johnson, 1997. "Expected Inflation in Canada 1988-1995: An Evaluation of Bank of Canada Credibility and the Effect of Inflation Targets," Canadian Public Policy, University of Toronto Press, vol. 23(3), pages 233-258, September.
  11. Engert, Walter & Hendry, Scott, 1998. "Forecasting Inflation with the M1-VECM: Part Two," Working Papers 98-6, Bank of Canada.
  12. Clinton, K. & Zelmer, M., 1997. "Constraints on the Conduct of Canadian Monetary Policy in 1990s: Dealing with Uncertainty in Financial Markets," Technical Reports 80, Bank of Canada.
  13. Allan Crawford & Seamus Hogan, 1999. "Downward wage rigidity," Bank of Canada Review, Bank of Canada, vol. 1998(Winter), pages 29-48.
  14. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
  15. Kevin Clinton, 1995. "The term structure of interest rates as a leading indicator of economic activity: A technical note," Bank of Canada Review, Bank of Canada, vol. 1994(Winter), pages 23-40.
  16. Nicholas Ricketts & David Rose, . "Inflation, Learning And Monetary Policy Regimes In The G-7 Economies," Working Papers 95-6, Bank of Canada.
  17. Svensson, Lars, 1999. "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," Seminar Papers 673, Stockholm University, Institute for International Economic Studies.
  18. Svensson, L.E.O., 1993. "The Simplest Test of Inflation Target Credibility," Papers 560, Stockholm - International Economic Studies.
  19. Coulombe, Serge, 1998. "A Non-Paradoxical Interpretation of the Gibson Paradox," Working Papers 98-22, Bank of Canada.
  20. Duguay, Pierre & Longworth, David, 1998. "Macroeconomic models and policy making at the bank of canada," Economic Modelling, Elsevier, vol. 15(3), pages 357-375, July.
  21. Duguay, Pierre, 1994. "Empirical evidence on the strength of the monetary transmission mechanism in Canada: An aggregate approach," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 39-61, February.
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