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Macroeconomic Switching Regimes and Monetary Policy in Canada

Applied Economics and Finance

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Field Value
 
Title Macroeconomic Switching Regimes and Monetary Policy in Canada
 
Creator Lange, Ronald Henry
 
Description This study examines the behaviour of monetary policy in Canada over the last 40 years using a Markov-switching VAR model of the macroeconomy. The Markov-switching estimates capture three continuous regimes that are interpreted as the ‘surprise’ regime from 1972Q1 to 1982Q2, the ‘recovery’ regime from 1982Q3 to 1991Q3 and the ‘target’ regime from 1991Q4 to 2014Q4. Monetary policy multipliers for the output gap are greater than one for all three regimes, suggesting that the central bank does not accommodate any expected changes in inflation over the long-run due to the domestic relationship between the output gap and future inflation. The long-run multipliers for inflation are equal to one in the surprise and recovery regimes, indicating that monetary policy also responds to offset inflation shocks. Overall, the policy multipliers and impulse response functions indicate a proactive central bank that responds systematically to movements in the output gap in order to control expected future inflation and to inflation surprises in the three regimes. The regime-dependent behaviour of monetary policy indicates a central bank pursuing an implicit form of inflation targeting as a means of achieving a nominal anchor for policy. The implicit inflation tar­gets are consistent with historical episodes of inflation in Canada over the past 40 years.
 
Publisher Redfame Publishing
 
Contributor —
 
Date 2017-06-01
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://redfame.com/journal/index.php/aef/article/view/2342
10.11114/aef.v4i4.2342
 
Source Applied Economics and Finance; Vol 4, No 4 (2017); 17-31
2332-7308
2332-7294
 
Language eng
 
Relation http://redfame.com/journal/index.php/aef/article/view/2342/2598
 
Rights Copyright (c) 2017 Applied Economics and Finance