A win-win monetary policy in Canada
The Lucas critique has exposed the problem of the trade-off between changes in monetary policy and structural breaks in economic time series. The search for and characterisation of such breaks has been a major econometric task ever since. We have developed an integral technique similar to CUSUM using an empirical model quantitatively linking the rate of inflation and unemployment to the change in the level of labour force in Canada. Inherently, our model belongs to the class of Phillips curve models, and the link between the involved variables is a linear one with all coefficients of individual and generalized models obtained by empirical calibration. To achieve the best LSQ fit between measured and predicted time series cumulative curves are used as a simplified version of the 1-D boundary elements (integral) method. The distance between the cumulative curves (in L2 metrics) is very sensitive to structural breaks since it accumulates true differences and suppresses uncorrelated noise and systematic errors. Our previous model of inflation and unemployment in Canada is enhanced by the introduction of structural breaks and is validated by new data in the past and future. The most exiting finding is that the introduction of inflation targeting as a new monetary policy in 1991 resulted in a structural break manifested in a lowered rate of price inflation accompanied by a substantial fall in the rate of unemployment. Therefore, the new monetary policy in Canada is a win-win one.
|Date of creation:||30 Mar 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Rudd, Jeremy & Whelan, Karl, 2005.
"New tests of the new-Keynesian Phillips curve,"
Journal of Monetary Economics,
Elsevier, vol. 52(6), pages 1167-1181, September.
- Doug Hostland, 1995.
"CHANGES IN THE INFLATION PROCESS IN CANADA: Evidence and Implications,"
- Doug Hostland, . "CHANGES IN THE INFLATION PROCESS IN CANADA: Evidence and Implications," Working Papers 95-5, Bank of Canada.
- Ivan O. KITOV & Oleg I. KITOV, 2010. "Dynamics Of Unemployment And Inflation In Western Europe: Solution By The 1- D Boundary Elements Method," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(2(12)/Sum), pages 94-113.
- Ivan O. Kitov & Oleg I. Kitov, 2008.
"The driving force of labor force participation in developed countries,"
90, ECINEQ, Society for the Study of Economic Inequality.
- Ivan O. KITOV, 2008. "The Driving Force of Labor Force Participation in Developed Countries," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(3(5)_Fall), pages 203-222.
- Kitov, Ivan & Kitov, Oleg, 2008. "The driving force of labor force participation in developed countries," MPRA Paper 8677, University Library of Munich, Germany.
- Kitov, Ivan & Kitov, Oleg & Dolinskaya, Svetlana, 2007.
"Inflation as a function of labor force change rate: cointegration test for the USA,"
2734, University Library of Munich, Germany.
- Ivan O. Kitov & Oleg I. Kitov & Svetlana A. Dolinskaya, 2008. "Inflation as a function of labor force change rate: cointegration test for the USA," Papers 0811.0892, arXiv.org.
- Ivan Kitov & Oleg Kitov & Svetlana Dolinskaya, 2007. "Inflation as a Function of Labor Force Change Rate: Cointegration Test for the USA," Mechonomics mechonomics3, Socionet.
- Benati, Luca, 2009. "Are 'intrinsic inflation persistence' models structural in the sense of Lucas (1976)?," Working Paper Series 1038, European Central Bank.
- James Rossiter, 2005. "Measurement Bias in the Canadian Consumer Price Index," Working Papers 05-39, Bank of Canada.
- Jeremy M. Piger & Robert H. Rasche, 2006.
"Inflation: do expectations trump the gap?,"
2006-013, Federal Reserve Bank of St. Louis.
- Andrew Atkeson & Lee E. Ohanian., 2001. "Are Phillips curves useful for forecasting inflation?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-11.
- Carl Chiarella & S. Gao, 2002. "Type I Spurious Regression in Econometrics," Working Paper Series 114, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:29975. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht)
If references are entirely missing, you can add them using this form.