Are Wealth Effects Important for Canada

Some analysts believe that a sharp rise in equity values was an important factor in the strong consumer spending between 1995 and 2000. Empirical evidence suggests, however, that consumer spending responds more to changes in housing wealth than it does to equity wealth. Pichette reports findings from an earlier study by Pichette and Tremblay (2003) which used a vector-error-correction model to determine the long-run relationship between various components of wealth and consumer spending. The study found that consumption does not respond significantly to a permanent increase in stock market wealth, while a permanent increase in housing wealth leads to a significant rise in consumption. These findings suggest important implications for monetary policy decision-makers, since movements in wealth will also affect aggregate demand and inflation.

Are Wealth Effects Important for Canada?

The authors examine the link between consumption and disaggregate wealth in Canada. They use a vector-error-correction model in which permanent and transitory shocks are identified using the restrictions implied by cointegration proposed by King, Plosser, Stock, and Watson (1991) and Gonzalo and Granger (1995). This procedure allows the authors to identify the reaction of consumption to both types of shocks and to calculate average marginal propensities to consume out of disposable income, human wealth, stock market wealth, and housing wealth. The authors find evidence of a significant housing wealth effect for Canada. Conversely, the evidence regarding the stock market wealth effect is weak. In terms of policy implications, other things being equal, the analysis of future inflationary pressures would require that more weight be put on fluctuations in housing prices than on fluctuations in stock prices.Domestic demand and components

Extracting Information from the Business Outlook Survey: A Principal-Component Approach

This article reviews recent work that uses principal-component analysis to extract information common to indicators from the Bank of Canada’s Business Outlook Survey (BOS). The authors use correlation analysis and an out-of-sample forecasting exercise to assess and compare the information content of the principal component with that of responses to key individual survey questions on growth in real gross domestic product and in real business investment. Results suggest that summarizing the common movements among BOS indicators may provide useful information for forecasting near-term growth in business investment. For growth in real gross domestic product, however, the survey’s balance of opinion on future sales growth appears to be more informative.

Dynamic Factor Analysis for Measuring Money

Technological innovations in the financial industry pose major problems for the measurement of monetary aggregates. The authors describe work on a new measure of money that has a more satisfactory means of identifying and removing the effects of financial innovations. The new method distinguishes between the measured data (currency and deposit balances) and the underlying phenomena of interest (the intended use of money for transactions and savings). Although the classification scheme used for monetary aggregates was originally designed to provide a proxy for the phenomena of interest, it is breaking down. The authors feel it is beneficial to move to an explicit attempt to measure an index of intended use. The distinction is only a preliminary step. It provides a mechanism that allows for financial innovations to affect measured data without fundamentally altering the underlying phenomena being measured, but it does not automatically accommodate financial innovations. To achieve that step will require further work. At least intuitively, however, the focus on an explicit measurement model provides a better framework for identifying when financial innovations change the measured data. Although the work is preliminary, and there are many outstanding problems, if the approach proves successful it will result in the most fundamental reformulation in the way money is measured since the introduction of monetary aggregates half a century ago. The authors review previous methodologies and describe a dynamic factor approach that makes an explicit distinction between the measured data and the underlying phenomena. They present some preliminary estimates using simulated and real data.Econometric and statistical methods; Monetary aggregates; Monetary and financial indicators

Measuring potential output at the Bank of Canada: The extended multivariate filter and the integrated framework

Estimating potential output and the output gap - the difference between actual output and its potential - is important for the proper conduct of monetary policy. However, the measurement and interpretation of potential output, and hence the output gap, is fraught with uncertainty, since it is unobservable. It is therefore important that we continually expand and improve upon existing models, and innovate by testing new approaches and incorporating them into the analysis of potential output and the output gap. Within this context, this paper first provides an assessment of the extended multivariate filter (EMVF), which the Bank has used since the late 1990s to come up with a baseline measure of the output gap. It is determined that the EMVF has several limitations that need to be addressed. Consequently, a modified version of the EMVF incorporating revised conditioning information is presented. In addition, a newly developed methodology, the integrated framework (IF), provides a separate analysis of trend labour input and trend labour productivity, and in doing so accounts for more long-term structural changes in the economy. While neither of these approaches is perfect, and both have limitations, they represent improvements over the conventional method. The paper also outlines how the modified EMVF, the IF, and information from the Bank's Business Outlook Survey and other sources are used to come up with an estimate of the current output gap and the future growth rate of potential output.L’estimation de la production potentielle et de l’écart de production – soit la différence entre la production effective et potentielle – est importante pour la conduite appropriée de la politique monétaire. Cependant, la production potentielle n’étant pas observable, la mesure et l’interprétation de cette variable, et par conséquent de l’écart de production, sont entourées d’incertitude. Il est donc essentiel de continuellement développer et améliorer les modèles existants, d’innover en mettant à l’essai de nouvelles méthodes et d’incorporer celles-ci dans l’analyse de la production potentielle et de l’écart de production. C’est dans cette optique qu’est d’abord proposée une évaluation du filtre multivarié élargi (EMVF) dont la Banque se sert depuis la fin des années 1990 pour établir une mesure de référence de l’écart de production. Ce filtre comporte plusieurs lacunes qu’il faut combler. Par conséquent, une version modifiée du filtre multivarié élargi comprenant une révision de l’information exploitée pour estimer la production potentielle est exposée. De plus, une méthode nouvelle procure une analyse distincte de la croissance tendancielle du facteur travail et de la croissance tendancielle de la productivité du travail, et prend en compte certains changements structurels à long terme de l’économie. Même si aucune de ces approches n’est parfaite, et bien qu’elles présentent toutes les deux des lacunes, elles constituent un progrès par rapport à la méthode de mesure habituelle de l’écart de production. L’étude décrit aussi de quelle manière le filtre élargi, le cadre intégré et l’information de l’enquête sur les perspectives des entreprises menée par la Banque sont utilisés avec d’autres sources pour estimer l’écart de production actuel et le taux de croissance future de la production potentielle

Extracting Information from the Business Outlook Survey Using Statistical Approaches Extracting Information from the Business Outlook Survey Using Statistical Approaches

Abstract Since the autumn of 1997, the regional offices of the Bank of Canada have conducted quarterly consultations with businesses across Canada. These consultations, summarized in the Business Outlook Survey (BOS), are structured around a survey questionnaire that covers topics of importance to the Bank, notably business activity, pressures on production capacity, prices and inflation, and credit conditions. The author aims to enhance our understanding of the survey's information content by extending the early work o

Extracting information from the business outlook survey using statistical approaches

Since the autumn of 1997, the regional offices of the Bank of Canada have conducted quarterly consultations with businesses across Canada. These consultations, summarized in the Business Outlook Survey (BOS), are structured around a survey questionnaire that covers topics of importance to the Bank, notably business activity, pressures on production capacity, prices and inflation, and credit conditions. The author aims to enhance our understanding of the survey's information content by extending the early work of Martin and Papile (2004) in two key ways. First, since all BOS questions are designed to capture some aspect of economic activity and are therefore interrelated, various approaches were considered to extract the common underlying variations among the indicators: a subjective approach (a simple average), principal-component analysis and factor analysis. Second, the information content of these common movements is assessed, using regression analysis and a forecasting assessment. The results suggest that all approaches to extract the information from the BOS provide very similar measures of underlying common variations. This underlying variable appears to be a useful indicator of economic activity, particularly for providing information on investment spending. However, the balance of opinion on future sales growth remains a better indicator than any measures of common movements for the growth of real GDP

La politique monétaire a-t-elle des effets asymétriques sur l'emploi?

Several economists, including Cover (1992), Ammer and Brunner (1995), Macklem, Paquet, and Phaneuf (1996), have worked over the past few years to determine whether monetary policy shocks have asymmetric effects on output. These authors have generally found that negative monetary shocks tend to reduce output growth significantly, and that positive shocks generally have a weaker or even negligible impact. The goal of this study is to determine whether asymmetric reactions can be observed in the Canadian labour market. Because employment is an important factor in the output process, discovering how this variable reacts to monetary policy shocks could lead to a better understanding of where asymmetric effects on output originate. I have estimated the model in two stages, using the generalized moments method, and have made correction to the variance-covariance matrix of estimators proposed by Newey (1984) in order to take into account the generated regressors. Overall, the results agree with those of previous output studies, except for employment defined as the number of hours worked per person in each period. The asymmetric effects observed, however, diminish or disappear altogether when other real variables are added to the model.Transmission of monetary policy

Les effets réels du cours des actions sur la consommation

Equity prices, stocks