The U.S. Stock Market and Fundamentals: A Historical Decomposition

The authors identify the fundamentals behind the dynamics of the U.S. stock market over the past 30 years. They specify a structural vector-error-correction model following the methodology of King, Plosser, Stock, and Watson (1991). This methodology identifies structural shocks with the imposition of long-run restrictions. It allows the authors to calculate an equilibrium measure of stock market value based on the permanent components of the time series. A better understanding of the components that drive stock market movements could provide insight into the potential effects of the recent technological revolution on the dynamics of the stock market's equilibrium value, as suggested by Hobijn and Jovanovic (2001).Transmission of monetary policy

Non-Linearities, Model Uncertainty, and Macro Stress Testing

A distinguishing feature of macro stress testing exercises is the use of macroeconomic models in scenario design and implementation. It is widely agreed that scenarios should be based on "rare but plausible" events that have either resulted in vulnerabilities in the past or could do so in the future. This requirement, however, raises a number of difficult statistical and methodological problems. Economic models, as well as the statistical models of the relationships among economic variables, generally focus on capturing the average rather than the extreme behaviour, and frequently rely on the assumption of linearity. In this paper we show that these models are particularly ill-suited for stress-testing as they do not adequately capture past behaviour in extreme events, nor do they generate plausible responses to shocks under stress. Whereas one might argue that the use of these models is still preferable to no having no models, since they at least impose the consistency restrictions on the paths generated under the scenario, failing to deal with a large extent of uncertainty of these paths may lead to results that are non-informative, and potentially misleading. The paper illustrates both of these problems by a series of examples, but our conclusions have broader implications for the types of models that would be useful in these exercises.Financial stability

Stress Testing the Corporate Loans Portfolio of the Canadian Banking Sector

Stress testing, at its most general level, is an investigation of the performance of an entity under abnormal operating conditions. The authors focus on one set of entities--the Canadian banking sector--and investigate losses in the loans portfolio of this sector as a function of changing circumstances in the different industries in which these loans reside. These circumstances are characterized by means of one summary measure--sectoral probabilities of default--and this measure is modelled as a function of macroeconomic variables. Using this model, the authors assess the interrelationship between the macroeconomic environment and sectoral defaults, and perform a series of stress tests under different scenarios that are thought to be most pertinent to Canada. The tools underlying the authors' analysis are general and can be applied to other countries, as well as to other macroeconomic scenarios.Financial stability, Financial institutions

The Development of an Electrostatic Storage Ring for Low Energy Electrons

A cyclical electrostatic device, referred to as an Electron Recycling Spectrometer (ERS) for charged particles is described and demonstrated. The system has been developed with storing electrons with typical kinetic energies of tens of eV. The orbital path for the electrons is 0.65 m long and defined through the application of design voltages to two series of cylindrical lenses inserted between two identical hemispherical deflector analyzers. The ERS design concept exploits the very low scattering cross sections in electron-molecule collisions, where the majority of electrons do not interact with the target. Unscattered electrons are collected and passed back through the ERS for another collision opportunity in the interaction region. The design of the charged particle optics and the basic operating characteristics of the storage ring are discussed. An overall transfer matrix is formed for the ERS by individual transfer matrices of charged particle optics. The conditions of stability within the ERS are extracted from the fundamental inequality involving the trace of the total transfer matrix. The stability lies within a region in a resonant-like pattern, defined by the focal lengths of the electrostatic lenses. Electron orbit spectra are displayed for a number of ERS operating conditions. Exponential decay rates, average orbit time, and mean electron energy are presented for each spectrum. Analysis was performed by fitting each orbit or peak distribution with a Gaussian curve. The noble gases helium and argon were used as the scattering target for electron detection. Ionization spectra provide long term storage times, as an electron beam must be present in the system to produce an ion species. The optimal ion storage exponential decay lifetime achieved is - 55 μs, which is target gas pressure limited and corresponds to - 200 orbits of the 0.65 m orbital circumference for a drop in particle yield of e *. Studies of beam dynamics were performed, analyzing the width evolution of each peak as a function of orbit number. Separate modes were observed that are non-linear with respect to the orbit number. * i.e. the base of the natural logarith

The credibility of monetary policy: a survey of the literature with some simple applications to Caanda

We don't have an abstract yet, sorry. But I think the title is pretty descriptive.monetary policy, credibility, dynamic inconsistency, inflation

La causalité entre la monnaie et le revenu : une analyse fondée sur un modèle VARMA-échelon

Les analyses de causalité, au sens de Wiener-Granger, sont habituellement fondées sur une spécification autorégressive (VAR) du processus générateur des données. C’est le cas, en particulier, pour les nombreuses études de causalité entre la monnaie et le revenu au niveau macroéconomique. Comme la spécification VAR ne constitue qu’une approximation et surtout n’est pas robuste à la désagrégation en sous-vecteurs, nous étudions ici la causalité entre monnaie et revenu à partir du cadre plus général et logiquement cohérent des modèles ARMA multivariés (VARMA). Pour résoudre les problèmes d’identification associés à ces modèles, nous considérons un modèle VARMA sous la forme échelon, lequel fournit automatiquement un modèle identifié. Nous utilisons, pour spécifier les ordres du modèle, la nouvelle méthodologie proposée par Nsiri et Roy (1992, 1996) et fondée sur une estimation des indices de Kronecker du modèle. Cette approche est appliquée à un modèle de l’économie américaine comprenant cinq variables : le revenu réel, le niveau des prix, un taux d’intérêt à court terme, la base monétaire et le multiplicateur de M1. Contrairement à certaines études antérieures, nous trouvons que les variables monétaires (base et multiplicateur) causent le revenu (au sens de Granger), la relation étant unidirectionnelle dans le cas de la base, tandis que le taux d’intérêt ne cause pas directement le revenu, mais a possiblement un effet indirect passant par les variables monétaires. Le niveau des prix apparaît comme une variable passive sans influence sur les autres variables du système.Causality analysis in the sense of Wiener-Granger are usually based on a vector autoregressive (VAR) specification of the data-generating process. This is the case in particular for the numerous studies of causality between money and income in macro-economics. Since a VAR specification is typically only approximate and, most importantly, is not robust to disaggregation into subvectors, we study here causality between money and income using the more general and logically coherent framework of vector ARMA models (VARMA). To solve the identification problems associated with such models, we consider a VARMA model in echelon form, which is automatically identified. To specify the orders of the model, we use the new methodology proposed by Nsiri and Roy (1992, 1996) which is based on estimating the Kronecker indices of the model. This approach is applied to a five-variable model of the U.S. economy, containing: real income, the price level, a short-term interest rate, the monetary base and the M1 multiplier. Contrary to earlier studies, we find that monetary variables (base and multiplier) cause income (in the sense of Granger), causality being unidirectional causality in the case of the base, while the interest rate does not cause income directly but may have an indirect effect through monetary variables. The price level appears to be a passive variable with no influence on the other variables of the system

Déflation et politique monétaire

Dans ce texte, les auteurs traitent des politiques que les autorités monétaires pourraient adopter pour mettre fin à une baisse généralisée des prix des biens et des services. Ils soutiennent que la priorité doit être d’asseoir la crédibilité de la politique monétaire. Ils distinguent deux types de crédibilité : celle relative à l’intention des autorités d’atteindre une cible de stabilité des prix et celle relative à leur capacité d’atteindre cette cible. Ils passent en revue quelques instruments susceptibles de renforcer ces deux types de crédibilité. Leur conclusion est que les autorités monétaires disposeraient de moyens puissants, bien que difficiles à doser, pour éliminer la déflation. Il faudrait des erreurs de politique persistantes et répétées pour qu’une déflation perdure.This paper discusses policies that monetary policy authorities could implement in response to a generalized and persistent decline in goods and services prices. The authors argue that in such situation the priority should be to defend the credibility of monetary policy. They differentiate between two types of credibility: that concerning the authorities’ intention to reach their target and that concerning the authorities’ capacity to reach the target. They then review a few instruments that could strengthen these two types of credibility. Their conclusion is that monetary policy authorities would have powerful tools at their disposal to escape deflation. Persistent and repeated policy errors would be needed for deflation to persist

Déflation et politique monétaire*

This paper discusses policies that monetary policy authorities could implement in response to a generalized and persistent decline in goods and services prices. The authors argue that in such situation the priority should be to defend the credibility of monetary policy. They differentiate between two types of credibility: that concerning the authorities’ intention to reach their target and that concerning the authorities’ capacity to reach the target. They then review a few instruments that could strengthen these two types of credibility. Their conclusion is that monetary policy authorities would have powerful tools at their disposal to escape deflation. Persistent and repeated policy errors would be needed for deflation to persist. Dans ce texte, les auteurs traitent des politiques que les autorités monétaires pourraient adopter pour mettre fin à une baisse généralisée des prix des biens et des services. Ils soutiennent que la priorité doit être d’asseoir la crédibilité de la politique monétaire. Ils distinguent deux types de crédibilité : celle relative à l’intention des autorités d’atteindre une cible de stabilité des prix et celle relative à leur capacité d’atteindre cette cible. Ils passent en revue quelques instruments susceptibles de renforcer ces deux types de crédibilité. Leur conclusion est que les autorités monétaires disposeraient de moyens puissants, bien que difficiles à doser, pour éliminer la déflation. Il faudrait des erreurs de politique persistantes et répétées pour qu’une déflation perdure.

Short-Run and Long-Run Causality between Monetary Policy Variables and Stock Prices

The authors examine simultaneously the causal links connecting monetary policy variables, real activity, and stock returns. Their interest lies in the fact that the dynamics of asset prices can provide key insights--in terms of information--for the conduct of monetary policy, since asset prices constitute a class of potentially leading indicators of either economic activity or inflation. This is of particular interest in the context of an inflation-targeting regime, where the monetary policy stance is set according to inflation forecasts. While most empirical studies on causality have examined this issue using Granger's (1969) original definition, the authors examine the causality relations through the generalization proposed in Dufour and Renault (1998). For the United States, the authors find no support for stock returns as a leading indicator of the macroeconomic variables considered, or for stock returns being influenced by those macroeconomic variables, except for one case: fluctuations in M1 tend to anticipate fluctuations in stock returns. Furthermore, the authors' empirical methodology allows them to infer that monetary aggregates may have significant predictive power for income and prices at longer horizons. It is therefore incorrect to dismiss the importance of monetary aggregates based on the usual Granger causality criteria. The causality pattern inferred by the authors' procedure is consistent with the Phillips curve (for the inflation dynamics) and with the Taylor rule in the case of the interest rate. For Canada, the results are much different. The authors show that there is a potential role for asset prices as a predictor of some important macroeconomic variables, namely interest rates, inflation, and output at policy-relevant horizons. Furthermore, some measures of monetary aggregates tend to dominate the interest rate as robust causal variables for output growth and inflation. However, the authors do not find strong evidence in favour of the Phillips curve and the Taylor rule. Finally, for both Canada and the United States, the authors show that seasonal adjustments can highly distort the inferred causality structure.Monetary and financial indicators