A Small Dynamic Hybrid Model for the Euro Area

The authors estimate and solve a small structural model for the euro area over the 1983–2000 period. Given the assumption of rational expectations, the model implies a set of orthogonality conditions that provide the basis for estimating the model’s parameter by generalized method of moments. The authors’ main results are: (i) the impulse-response functions implied by the model are consistent with the standard stylized facts about the dynamic effects of monetary policy, (ii) evidence suggests that flexibility in Europe has increased since the adoption of the Maastricht Treaty, and (iii) the inflation expectations captured by the model might explain the European Central Bank’s reluctance to ease monetary conditions in 2000.Transmission of monetary policy

Simulations du ratio du service de la dette des consommateurs en utilisant des données micro

The author constructs a formal analytic framework to simulate the impact of various economic shocks on the household debt-service ratio, using data from the Canadian Financial Monitor (CFM) survey. The impact of these shocks on individual households depends on the socio-economic characteristics of the latter. The framework also allows consideration of both symmetric and asymmetric shocks to incomes. The author's work is original in several respects: it captures the heterogeneity of the impact of these shocks on households, it uses cross-sectional data to estimate credit-growth equations, and it determines household credit growth based on income, interest rates, and housing prices. To illustrate the usefulness of his approach, the author provides income, debt, and interest rate scenarios, and then simulates his model over twelve periods. This methodology can, of course, be used with other microdata.Econometric and statistical methods; Financial stability

Does Financial Structure Matter for the Information Content of Financial Indicators?

Of particular concern to monetary policy-makers is the considerable unreliability of financial variables for predicting GDP growth and inflation. As Stock and Watson (2003) find, some financial variables work well in some countries or over some time periods and forecast horizons, but the results do not show any clear pattern. This may be caused by the changing nature of financial structures within countries across time, or the differing types of financial structures across countries. The authors assess the extent to which financial structure across countries influences the information content of financial variables for predicting real GDP growth and inflation. Their assumption is that financial asset prices will dominate financial quantities in economies with highly developed market-based financial systems. The authors use standard methods to determine the predictive content of common financial asset prices and quantities for 29 countries. They find no systematic pattern between financial structure and whether financial asset prices or quantities are the best financial indicators for monetary policy. Importantly, financial quantities are sometimes the best financial indicator, even in economies with highly developed market-based financial systems. The authors conclude that it would be difficult to tell, a priori, whether a financial asset price or quantity would be the best indicator for monetary policy for a particular country at a particular point in time.Inflation and prices; Business fluctuations and cycles; Credit and credit aggregates; Monetary aggregates; Interest rates

Changes in the Indicator Properties of Narrow Monetary Aggregates

Although many countries have abandoned monetary targeting in recent decades, monetary aggregates are still useful indicators of future economic activity. Past research has shown that, compared with other monetary aggregates and expressed in real terms, net M1 and gross M1 have traditionally provided superior leading information for output growth. Yet financial innovations and the elimination of reserve requirements over the past two decades have made it increasingly difficult for financial institutions to differentiate between demand and notice deposits, suggesting the need to re-examine the information content of narrow monetary aggregates that depend on such a distinction. Based on an analysis over a sample period from 1975Q1 to 2005Q1, the authors determine that the leading-indicator properties of the narrow monetary aggregates for output growth have shifted over time and that, since 1993, real M1+ has become a better indicator of future output growth than real gross and net M1.

A Framework to Assess Vulnerabilities Arising from Household Indebtedness using Microdata

Rising levels of household indebtedness have created concerns about the vulnerability of households to adverse economic shocks and the impact on financial stability. To assess this risk, we present a formal stress-testing framework that uses microdata to simulate how various economic shocks affect the distribution of the debt-service-ratio (DSR) for the household sector. We use Ipsos Reid Canadian Financial Monitor (CFM) survey data to construct the actual DSR distribution for households at the starting point of the exercise. The next step is to simulate changes in the distribution using a macro scenario describing the evolution of some aggregate variables, and micro behavioural relationships. For example, to simulate credit growth for individual households, we use cross-sectional data to estimate debt-growth equations as a function of household income, interest rates, and housing prices. The simulated distributions provide information on vulnerabilities in the household sector. Finally, we present a combined methodology where changes in the probability of default on household loans are used as a metric to evaluate the quantitative impact of negative employment shocks on the resilience of households and loan losses at financial institutions

Quelques résultats empiriques relatifs à l'évolution du taux de change Canada/États-Unis

This paper explores the extent to which factors other than commodity and energy prices may have contributed to the Canadian dollar's depreciation since the early 1970s. The variables considered include among others budgetary conditions and productivity. The approach involves a long-term determination, using cointegration methodology, of variables that may have played a major role in the behaviour of the real exchange rate. The authors conclude that, while growing indebtedness in Canada has contributed to the Canadian currency's depreciation against the U.S. dollar, it explains only 20 per cent of that decline during the 1990s. Non technical summary Amano and van Norden (1995) have developed a model for determining the real Can$/US$ exchange rate that has proven itself particularly robust over time, in terms of statistical significance and stability. This model consists of both short- and long-term components. The long-term component takes the form of a term of error correction arising from a linear relationship between the real exchange rate, commodity prices (excluding energy), and the price of energy. The short-term dynamic is essentially induced by the spread between interest rates in Canada and the United States. In this paper, the authors attempt to examine the extent to which factors other than commodity and energy prices may have contributed to the Canadian dollar's depreciation since the early 1970s. The variables considered are selected on the basis of theoretical or earlier empirical criteria, and include the productivity gap between Canada and the United States, the gap in the ratio of public spending to GDP, the gap in income per capita, net foreign assets, and the gap in the ratios of public debt to GDP. Of these variables, only the gap between debt-to-GDP ratios in Canada and the United States would appear to provide any additional information. Including this variable improves the global specification of the model and its predictive power, especially for the period relating to the early 1990s. Although commodity price variable continue to dominate real exchange rate dynamics over the entire sample, debt assumes ever greater importance from the mid-1980s, when the Canada-U.S. indebtedness gap began to widen. The portion attributable to indebtedness tends to fade towards the end of the 1980s, but reasserts itself in the mid-1990s, when the indebtedness gap (as a proportion of GDP) reached record levels. The indebtedness gap at that time could explain as much as 20 per cent of the depreciation of Canada's real exchange rate, but this percentage starts to decline towards the end of 1997, as the country's public finances strengthened. It is noteworthy that the price of energy becomes steadily less significant as the estimation period is lengthened. Thus, the commodity price index and the Canada-U.S. indebtedness gap alone provide an almost complete explanation of real exchange rate behaviour over the period 1974-1998. This observation is consistent with various empirical tests that point to a continuous drop in the predictive power of energy prices in several macroeconomic relationships.Exchange rates