Exchange Rate Pass-through and Monetary Policy: How Strong is the Link?

Several authors have presented reduced-form evidence suggesting that the degree of exchange rate pass-through to the consumer price index has declined in Canada since the early 1980s and is currently close to zero. Taylor (2000) suggests that this phenomenon, which has been observed for several other countries, may be due to a change in the behaviour of inflation. Specifically, moving from a high to a low-inflation environment has reduced the expected persistence of cost changes and, by consequence, the degree of pass-through to prices. This paper extends his argument, suggesting that this change in persistence is due to a change in the parameters of the central bank's policy rule. Evidence is presented for Canada indicating that policy has responded more aggressively to inflation deviations over the low pass-through period relative to the high pass-through period. We test the quantitative importance of this change in policy for exchange rate pass-through by varying the parameters of a simple monetary policy rule embedded in an open economy, dynamic stochastic general equilibrium model. Results suggest that increases in the aggressiveness of policy consistent with that observed for Canada are sufficient to effectively eliminate measured pass-through. However, this conclusion depends critically on the inclusion of price-mark-up shocks in the model. When these are excluded, a more modest decline to pass-through is predicted.Exchange rates; Transmission of monetary policy

Price-Level Targeting and Relative-Price Shocks

Stephen Murchison reviews the findings of recent Bank of Canada research on the relative merits of inflation targeting and price-level targeting (PLT) for a small open economy, such as Canada's, that is susceptible to large and persistent terms-of-trade shocks. These shocks have been identified as a potential threat to PLT, since central bankers have to induce large fluctuations in output if they are to unwind all pass-through to the price level. The balance of evidence suggests that PLT and inflation targeting, implemented through simple policy rules, are fairly similar in their ability to stabilize inflation, the output gap, and interest rates. The author shows that this conclusion is robust to the inclusion of several types of relative-price shocks, including shocks to the terms of trade. Research on the optimal price index under PLT is also discussed, and Murchison concludes that, conditional on adopting PLT, the overall CPI would represent close to an ideal index to target.

Monetary Policy Rules in an Uncertain Environment

This article examines recent research on the influence of various forms of economic uncertainty on the performance of different classes of monetary policy rules: from simple rules to fully optimal monetary policy under commitment. The authors explain why uncertainty matters in the design of monetary policy rules and provide quantitative examples from the recent literature. They also present results for several policy rules in ToTEM, the Bank of Canada's main model for projection and analysis, including rules that respond to price level, rather than to inflation.

Declining Inflation Persistence in Canada: Causes and Consequences

The persistence of both core and total consumer price index inflation in Canada has declined significantly since the 1980s. In addition to providing up-to-date estimates of inflation persistence, this article examines possible reasons for the decline suggested in the literature. The role played by monetary policy, through its effect on price- and wage-setting behaviour, is distinguished from possible changes to the structure of the economy that are independent of monetary policy. The authors also discuss the implications for monetary policy of low structural persistence in inflation, including the choice of an inflation-targeting regime versus a price-level-targeting regime.

ToTEM: The Bank of Canada's New Projection and Policy-Analysis Model

The Terms-of-Trade Economic Model, or ToTEM, replaced the Quarterly Projection Model (QPM) in December 2005 as the Bank's principal projection and policy-analysis model for the Canadian economy. Benefiting from advances in economic modelling and computer power, ToTEM builds on the strengths of QPM, allowing for optimizing behaviour on the part of firms and households, both in and out of steady state, in a multi-product environment. The authors explain the motivation behind the development of ToTEM, provide an overview of the model and its calibration, and present several simulations to illustrate its key properties, concluding with some indications of how the model is expected to evolve going forward.

The Zero Bound on Nominal Interest Rates: Implications for Monetary Policy

One of the most important factors that must be considered if countries are thinking about lowering the target level of inflation much below 2 per cent is the zero interest bound. Targeting inflation rates that are too low, the authors note, may restrict the ability of monetary policy to respond to economic shocks by limiting the amount by which interest rates can be eased. The size of the shocks hitting an economy, the formation of inflation expectations, and the conduct of monetary policy are also seen to exert an important influence on the risks of hitting the zero interest bound. The evidence that the authors review suggests that the probability of encountering the zero bound when the average inflation is at least 2 per cent are relatively small.

A Structural Small Open-Economy Model for Canada

The authors develop a small open-economy dynamic stochastic general-equilibrium (DSGE) model in an attempt to understand the dynamic relationships in Canadian macroeconomic data. The model differs from most recent DSGE models in two key ways. First, for prices and wages, the authors use the time-dependent staggered contracting model of Dotsey, King, and Wolman (1999) and Wolman (1999), rather than the Calvo (1983) specification. Second, to model investment, the authors adopt Edge's (2000a, b) framework of time-to-build with ex-post inflexibilities. The model's parameters are chosen to minimize the distance between the structural model's impulse responses to interest rate, demand (consumption), and exchange rate shocks and those from an estimated vector autoregression (VAR). The majority of the model's theoretical impulse responses fall within the 5 and 95 per cent confidence intervals generated by the VAR.Business fluctuations and cycles; Economic models; Inflation and prices

Alien Registration- Murchison, Clayton (Presque Isle, Aroostook County)

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Labor market developments in the United States and Canada since 2000: conference overview and summary of papers

These articles were presented at a conference in December 2004, convened to consider the disparity in job growth between the United States and Canada-namely, while the United States was struggling to create jobs, the number of Canadian jobs was increasing. The conference was cosponsored by the Canadian Consulate General in New York, the Centre for the Study of Living Standards, the Federal Reserve Bank of New York and the New York Association for Business Economics.Labor market ; Labor market - Canada ; Business cycles

Alien Registration- Murchison, Ellen (Presque Isle, Aroostook County)

https://digitalmaine.com/alien_docs/33678/thumbnail.jp