Learning and the Welfare Implications of Changing Inflation Targets

This paper computes the welfare consequences, for a representative agent, of a shift in the inflation target of monetary authorities. The welfare computations are conducted first by comparing the two steady states that the different inflation targets entail, and next by accounting for the transition from one steady-state to the next. Further, the paper allows this transition to be characterized by incomplete information, under which private agents learn about the inflation target shift using Bayesian updating. The analysis is repeated in a variety of model parameterizations, to test the robustness of the results. We find that the welfare benefits of reducing the target rate of inflation from 2% initially to 0% may at first appear to be significant. When measured by comparing steady states, these benefits are worth up to 0.5% of steady-state consumption. However, accounting for the transition towards the new, low inflation steady state significantly reduces the computed benefits, by at least one half.Inflation targeting, welfare benefits of lower inflation, new keynesian model

Dynamic General-Equilibrium Models and Why the Bank of Canada is Interested in Them

Dynamic general-equilibrium models (DGEMs) are being increasingly used in macroeconomic research. In this article, the author describes the main features of these models and outlines their contribution to economic research performed at the Bank of Canada. He notes that the basic principle of DGEMs is that the modelling of economic activity, even on a scale as large as the economy of a country, should start with a series of microeconomic problems (at the scale of individuals), which, once resolved, are aggregated to represent the macroeconomic reality described by the model.

Forecasting with the New-Keynesian Model: An Experiment with Canadian Data

This paper documents the out-of-sample forecasting accuracy of the New Keynesian Model for Canadian data. We repeatedly estimate the model over samples of increasing lengths, forecasting out-of-sample one to four quarters ahead at each step. We then compare these forecasts with those arising from an unrestricted VAR using recent econometric tests. We show that the accuracy of the New Keynesian model's forecasts compares favourably to that of the benchmark. The principle of parsimony is invoked to explain these resultsout-of-sample forecasting ability, estimated DGSE models

Bank Capital, Agency Costs, and Monetary Policy

Evidence suggests that banks, like firms, face financial frictions when raising funds. The authors develop a quantitative, monetary business cycle model in which agency problems affect both the relationship between banks and firms and the relationship between banks and their depositors. As a result, bank capital and entrepreneurial net worth jointly determine aggregate investment, and are important determinants of the propagation of shocks. The authors find that the effects of monetary policy and technology shocks are dampened but more persistent in their model than in an economy where the information friction that banks face is reduced or eliminated. After documenting that the bank capital-asset ratio is countercyclical in the data, the authors show that their model, in which movements in this ratio are market-determined, can replicate the countercyclical ratio.Business fluctuations and cycles; Financial institutions; Transmission of monetary policy

Inertial Measurement Units (IMUs) in Drowning Prevention: An Exploratory Study

The use of inertial measurement unit (IMUs) sensors in competitive swimming movement analysis has become increasingly popular but has not been applied to measuring water competencies related to drowning prevention. This study explored the potential use of IMU sensors in three simulated water competency activities in a pool environment. Participants were a subset (n = 12) of a cohort of students (n = 37) taking part in the Can You Swim in Clothes? project. Participants undertook a swim for speed test over 25 m, a distance swim of 5-min duration, and a flotation test, also for 5 min, wearing swimwear and again in lightweight street clothing while wearing an IMU to measure leg acceleration forces. Results showed that clothing impeded swimming sprint speed and distance but not flotation. Authors suggest further research with regard to IMU placement, appropriate survival activities, and measurement protocols and recommend the need for expanded future IMU use

Are Inflation Expectations Rational?

Simple econometric tests reported in the literature consistently report what appears to be a bias in inflation expectations. These results are commonly interpreted as constituting evidence overturning the hypothesis of rational expectations. In this paper, we investigate the validity of such an interpretation. The main tool utilized in our investigation is a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along a number of dimensions. By construction, the model embedded the assumption of rational expectations. Standard regressions run on equilibrium realizations of inflation and inflation expectations nevertheless reveal an apparent bias in inflation expectations. In these simulations, the null hypothesis of rational expectations is incorrectly rejected in a large percentage of cases; a result that casts some doubt on conventional interpretations of the evidence.

Learning and the Welfare Implications of Changing Inflation Targets

This paper computes the welfare consequences, for a representative agent, of a shift in the inflation target of monetary authorities. The welfare computations are conducted first by comparing the two steady states that the different inflation targets entail, and next by accounting for the transition from one steady-state to the next. Further, the paper allows this transition to be characterized by incomplete information, under which private agents learn about the inflation target shift using Bayesian updating. The analysis is repeated in a variety of model parameterizations, to test the robustness of the results. We find that the welfare benefits of reducing the target rate of inflation from 2% initially to 0% may at first appear to be significant. When measured by comparing steady states, these benefits are worth up to 0.5% of steady-state consumption. However, accounting for the transition towards the new, low inflation steady state significantly reduces the computed benefits, by at least one half

Are Inflation Expectations Rational?

Several recent papers report evidence of an apparent statistical bias in inflation expectations and interpret these findings as overturning the rational expectations hypothesis. In this paper, we investigate the validity of such an interpretation. We present a computational dynamic general equilibrium model capable of generating aggregate behavior similar to the data along several dimensions. By construction, model agents form "rational" expectations. We run a standard regression on equilibrium realizations of inflation and inflation expectations over sample periods corresponding to those tests performed on actual data and find evidence of an apparent bias in inflation expectations. Our experiments suggest that this incorrect inference is largely the product of a small sample problem, exacerbated by short-run learning dynamics in response to infrequent shifts in monetary policy regimes.Regime changes; Learning dynamics; Monte Carlo exp eriments; Sample size.

Bank Leverage Regulation and Macroeconomic Dynamics

This paper assesses the merits of countercyclical bank balance sheet regulation for the stabilization of financial and economic cycles and examines its interaction with monetary policy. The framework used is a dynamic stochastic general equilibrium model with banks and bank capital, in which bank capital solves an asymmetric information problem between banks and their creditors. In this economy, the lending decisions of individual banks affect the riskiness of the whole banking sector, though banks do not internalize this impact. Regulation, in the form of a constraint on bank leverage, can mitigate the impact of this externality by inducing banks to alter the intensity of their monitoring efforts. We find that countercyclical bank leverage regulation can have desirable stabilization properties, particularly when financial shocks are an important source of economic fluctuations. However, the appropriate contribution of countercyclical capital requirements to stabilization after a technology shock depends on the size of the externality and on the conduct of the monetary authority.Moral hazard, bank capital, countercyclical capital requirements, leverage, monetary policy

Forecasting Canadian Time Series with the New-Keynesian Model

This paper documents the out-of-sample forecasting accuracy of the New Keynesian Model for Canada. We repeatedly estimate our variant of the model on a series of rolling subsamples, forecasting out-of-sample one to eight quarters ahead at each step. We then compare these forecasts to those arising from simple VARs, using econometric tests of forecasting accuracy. Our results show that the forecasting accuracy of the New Keynesian model compares favourably to that of the benchmarks, particularly as the forecasting horizon increases. These results suggest that the model can become a useful forecasting tool for Canadian time series. The principle of parsimony is invoked to explain our findings.New Keynesian Model, Forecasting accuracy