The Structure of the Small Annual Model

This volume contains a detailed description of the structure and sectoral properties of the Bank of Canada's Small Annual Model, SAM. The SAM model, constructed in the Research Department of the Bank, is designed for medium- to long-term simulation. It is small by econometric model standards; the version described in this report has 25 stochastic equations and 103 equations in total.

SAM is a model of the aggregate Canadian economy with complete wealth accounting, in which markets work and generate eventual convergence to a competitive steady state. At the heart of the model is a description of an equilibrium path that exploits restrictions from formal theory, particularly with respect to the long-run determinants of aggregate supply. The complete wealth accounting is an important part of the model because of the attention one must pay to stock equilibrium in long-term analysis. In SAM all flow/stock linkages are explicit and integrated into the budget constraints and other equations that influence the model's long-run properties.

Behaviour in SAM is forward looking. For example, expectations formation is specified to be quasi-rational; that is, it uses information about the steady state to which the system is tending. Some of the behavioural theory is explicitly forward looking—formal intertemporal optimization; but even where the theory is static, the model is given forward-looking properties through the specification of dynamic processes of adjustment towards the steady-state path.

SAM should be most useful for the analysis of the medium- to long-run implications of aggregate foreign disturbances and domestic monetary and fiscal policy initiatives. The model has been designed to be flexible and the documentation attempts to show how it can be used in simulation with various policy prescriptions and assumptions about model structure.