Regime-switching monetary policy in Canada

This paper investigates the interactions between changes in stock prices and monetary policy regimes in four emerging Asian countries—Korea, Malaysia, Singapore, and Thailand—using a Markov regime-switching autoregressive conditional heteroskedasticity (MS-ARCH) model. To connect the stability of monetary policy to stock market volatility, the authors assume that monetary policy and stock price regimes are governed by the same fundamental: the state of the economy. They find that there exists an asymmetric relationship between the volatility of stock prices and the stability of monetary policy regimes. Most of their findings are consistent with real world observations.

The objective of this study is to identify monetary policy reactions in a nonlinear, structural vector autoregression (VAR) framework, with regime-switching contemporaneous policy responses in a small open economy. The key finding is that monetary policy in Canada responds contemporaneously to disturbances in the real exchange rate, as well as the output gap and inflation. The Bank of Canada is found to have much larger responses to exchange rate fluctuations during volatile periods than more stable periods. However, the Bank is found statistically to have a relatively linear reaction function with symmetric responses to output and inflation shocks across interest rate regimes. The estimates for the contemporaneous responses to the output gap in both regimes are found to be virtually identical to the 0.5 weights in the original Taylor rule for the United States, while the responses to inflation surprises are slightly smaller. Overall, the Bank of Canada is found to have operated within the range of optimal responses suggested by small-scale structural models in the normative literature on monetary policy rules.

Motivated by the dollarization debate in Mexico, we estimate an identified vector autoregression for the Mexican economy, using monthly data from 1976 to 1997, taking into account the changes in the monetary policy regime that occurred during this period. We find that (i) exogenous shocks to monetary policy have had no impact on output and prices; (ii) most of the shocks originated in the foreign sector; (iii) disturbances originating in the U. S. economy have been a more important source of fluctuations for Mexico than shocks to oil prices. We also study the endogenous response of domestic monetary policy by means of a counterfactual experiment. The results indicate that the response of monetary policy to foreign shocks played an important part in the 1994 crisis.

The monetary policy of India has undergone substantial changes since 2013, particularly after taper tantrum episodes. The RBI moved from WPI to CPI for measuring inflation. Monetary policy anchoring shifted from a multiple-indicator approach (MIA) to flexible inflation targeting (FIT) in 2016 to deal with the aftermath of the global financial crisis. In this context, the study examined whether there was a significant shift in the monetary policy regime using a non-linear model (Markov Switching-Vector Autoregression Model) covering monthly data from 2013 to 2020. The study also investigated the role of the inflation rate, oil price, growth rate, and exchange rate in influencing monetary policy in India. The study found no change in the RBI monetary policy regime, and monetary policy remained biased towards controlling the inflation rate.

Comment

This paper provides a case study to characterize the monetary policy regime in Malaysia, from a medium‐ and long‐term perspective. Specifically, we ask how the Central Bank of Malaysia, Bank Negara Malaysia (BNM), has structured its monetary policy regime, and how it has conducted monetary and exchange rate policy under the regime. By conducting three empirical analyses, we characterize the monetary and exchange rate policy regime in Malaysia by three intermediate solutions on three vectors: the degree of autonomy in monetary policy, the degree of variability of the exchange rate, and the degree of capital mobility.

Navigating Turbulence: Canadian Monetary Policy Since 2004

There is little doubt that the Bank of Canada and Canadian monetary policy have been subjected to more public criticism since 1954 than at any other time since the Bank began operations in 1935. The force and the persistence of the criticism may in part be explained by a coincidence of events which included a move toward severe monetary restraint, a change of governor at the Bank of Canada, two national elections, and a change in government. Public criticism has for the most part concerned itself with the degree of monetary restraint or monetary ease in the economy generally and in specific sectors, with the timing of changes in policy and with the appropriateness of policy in the light of economic conditions. This paper will let those matters rest. Rather it will try to determine whether in a more fundamental sense the Bank's operations are in some respects open to criticism.There would appear to be four important aspects to the Bank of Canada's approach to central banking: the Bank's interpretation of its role in the allocation of capital; its conception of the mechanism by which monetary policy becomes effective and of the bounds within which monetary management must operate; its method of making quantitative monetary controls more effective; and its emphasis on the use of moral suasion. The third section will include an examination of the new Bank Rate.

Monetary policy regime shifts and the unusual behavior of real interest rates

This paper documents common shifts in the behaviour of real interest rates across different countries following the announcement of monetary policy regime changes of US Federal Reserve procedures in October 1979. This evidence suggests that the observed, big fluctuations in real interest rates in the seventies and eighties across countries may be linked to the changes of the US monetary policy. It also emphasizes the international effects of US monetary policy on ex ante real interest rates across countries.

Corporate lending rates have a significant impact on investment and the overall economy. In order to influence rates, the authorities pursue their own economic policy. One of these is monetary policy. In recent decades, an increasing number of countries have been modernizing their monetary policies to achieve their inflation and economic growth targets.The paper is devoted to the analysis of monetary policy (MP) regimes impact on corporate lending rates. The objective of the study is to confirm or reject three hypotheses. Each of the hypotheses is related to a specific aspect of the research topic, specifically, the differences between countries in terms of corporate lending rates and inflation, and the link between the above indicators. As part of the methodological component, the paper uses, firstly, regression equations to analyze the relationship between the variables of inflation and lending rates, and secondly, statistical analysis of selected indicators. The main result of the paper is the verification of all three hypotheses and the conclusion that the most effective monetary policy regime that would provide the lowest and least volatile corporate loan rates is the flexible inflation targeting regime. Therefore, in order to minimize corporate rates, the central regulator of a country that already implements inflation targeting (IT) should adopt a flexible inflation targeting regime. For countries with alternative monetary policy regimes, it would be more optimal to implement inflation targeting initially, and then modify it in a flexible IT, because flexible inflation targeting requires a prior proven track record in implementing classical IT.

Understanding the behavior of real interest rates is a central issue in monetary/macro economics. Recently researchers have begun to use futures market data to examine real interest rate behavior. Futures market data can be used to directly construct own-commodity real interest rates ? i.e., the ex-ante real return on a bond in terms of specific commodities -- and then the own-commodity real rates can be used to make inferences about the real interest rate for the aggregate economy, This paper examines whether futures market data can be used to understand the behavior of real interest rates. The conclusion is a negative one: Futures market data do not appear to be particularly informative about real interest rates. In coming to this conclusion, the paper examines the data in several ways. First. the ex-ante relative price movement embedded in the own-commodity real rates (the noise) is calculated to be on the order of over one hundred times more variable than the aggregate real interest rate (the signal), Own-commodity real rates are thus unlikely to contain much information about the aggregate real interest rate. Second. several widely accepted facts about the behavior of aggregate real interest rates in the 1960s are not at all evident in the own-commodity real rate data. Thus, analysis of own- commodity real rates provides a misleading impression of aggregate real rate movements for a period which displays the most striking movements of real interest rates in the postwar period. Finally, an econometric analysis of own-commodity real rate behavior fails to find evidence of a shift in the behavior of real interest rates when the monetary policy regime changes in October 1579, a finding that is at odds with previous strong findings in the literature.

This paper extends the micro-founded DSGE open economy model by incorporating unionized labor markets. Unlike the standard framework with atomistic unions, large labor unions consider broader economic conditions and internalize the impact of their wage settlements on the aggregate economy. By emphasizing the interplay between internal and external sources of economic distortions and monetary policy regimes, we demonstrate that the economy’s openness, the degree of wage-setting centralization, and different monetary policy regimes influence unions’ wage-setting behavior and macroeconomic outcomes. The analysis identifies three key effects—the monetary policy effect, the intertemporal substitution effect, and the open economy effect—that large unions internalize when adjusting their wage demands in response to policy actions and external conditions. This novel wage-based mechanism alters the New Keynesian Phillips curve, with implications for the conduct of monetary policy, particularly in shaping the economy’s response to shocks and equilibrium determinacy. The real effects of monetary policy shocks under different policy settings depend on large unions’ internalization effect. In a unionized labor market, the impact of monetary shocks on the real economy is amplified compared to the standard case with atomistic unions. Additionally, interactions among large unions, openness, and monetary policy regimes affect determinacy properties of equilibrium (i.e., uniqueness of the solution path) under various forms and timing of monetary policy rules. This paper offers new insights into how union coordination interacts with monetary policy regimes and trade openness to shape macroeconomic stability (uniqueness of rational expectations equilibrium) and the dynamic response of the economy to shocks. These findings enhance our understanding of monetary policy design in economies with strong large labor institutions and external trade exposure—an area that remains underexplored in the existing DSGE literature.

The aim of this paper is to analyze empirically the interaction between monetary and fiscal policy in a small open transition economies: the case the Republic of Macedonia. This paper employs SVAR methodology to examine jointly the impact monetary and fiscal policy on real GDP and prices. The result reveals that the monetary policy counteracts the effects of fiscal policy and persists until the effects of fiscal policy changes disappear. This causes a crowding out effect. In addition, the result shows that the best fiscal policy for stimulating the economy appears to be one of tax-cuts. The empirical research, in jointly analyzing fiscal and monetary policy also provides an additional, possibly interesting result. The sizes of the responses of real GDP and prices to monetary shock are not significantly reduced when fiscal shock is included into monetary SVAR.

Applying local projection-based instrumental variables methods, we empirically explore monetary and fiscal policy dependencies in a small open and emerging economy, Poland. In particular, we study whether the effects of a government spending shock on output depend on the degree to which monetary policy is active. We conclude that the cumulative government spending multiplier is not systematically dependent on the monetary policy regime. It suggests that monetary policy does not react to fiscal expansions, which can be related to sustainability of fiscal policy in Poland in the period under consideration. We estimate a peak cumulative linear multiplier of 1.53 after six quarters over the full sample and of 1.38 after eight quarters over the period before Covid-19. In addition, we detect no dependence on business cycle states. Furthermore, we find no statistically significant crowding-out effects originating from government investment. Our results are robust to various alternative empirical specifications.