Bank of Canada Review - Autumn 2006

October 22, 2006
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BoC Review - Autumn 2006
Available as: PDF

Cover page

The "pretended" Bank of Upper Canada — Kingston (1819-22)

The note is part of the National Currency Collection of the Bank of Canada.
Photography by Gord Carter
Content Type(s): Publications, Bank of Canada Review
October 22, 2006

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

Bank of Canada Review - Autumn 2006 Paul Fenton, Stephen Murchison
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.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Business fluctuations and cycles, Economic models
October 20, 2006

MUSE: The Bank of Canada's New Projection Model of the U.S. Economy

Bank of Canada Review - Autumn 2006 Marc-André Gosselin, René Lalonde, Nicolas Parent
Staff projections provided for the Bank of Canada's monetary policy decision process take into account the integration of Canada's very open economy within the global economy, as well as its close real and financial linkages with the United States. To provide inputs for this projection, the Bank has developed several models, including MUSE, NEUQ (the New European Quarterly Model), and BoC-GEM (Bank of Canada Global Economy Model), to analyze and forecast economic developments in the rest of the world. The authors focus on MUSE, the model currently used to describe interaction among the principal U.S. economic variables, including gross domestic product, inflation, interest rates, and the exchange rate. Brief descriptions are also provided of NEUQ and BoC-GEM.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Econometric and statistical methods, Economic models, International topics
October 8, 2006

Modelling Financial Channels for Monetary Policy Analysis

Bank of Canada Review - Autumn 2006 Ian Christensen, Ben Fung, Césaire Meh
The Bank of Canada considers a wide range of information and analysis before making a monetary policy decision and uses carefully articulated models to produce economic projections and to examine alternative scenarios. This article describes an ongoing research agenda at the Bank to develop models in which financial variables play an active role in the transmission of monetary policy actions to economic activity. Such models can help to analyze information from the financial side of the economy and to provide an overall view of the implications of financial developments for the current economic outlook. The authors also explain how this research can help address other issues relevant to the objectives of monetary policy, including how asset-price movements should be taken into account in the monetary policy framework.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credit and credit aggregates, Economic models, Monetary policy transmission
October 3, 2006

A New Effective Exchange Rate Index for the Canadian Dollar

Bank of Canada Review - Autumn 2006 Janone Ong
An effective exchange rate is a measure of the value of a country's currency vis-à-vis the currencies of its most important trading partners. The Bank of Canada has created a new Canadian-dollar effective exchange rate index (CERI) to replace the C-6 index that it currently uses. The CERI uses multilateral trade weights published by the International Monetary Fund and includes the six currencies of countries or economic zones with the largest share of Canada's international trade. As such, it better reflects the recent changes in Canada's trade profile, including the rise in the importance of China and Mexico and the relative decline in importance of Europe and Japan in Canada's international trade. The author describes the methodology and construction of the new index and reviews the advantages it offers over the C-6, particularly the use of multilateral trade weights, the inclusion of trade in services, and the use of more recent trade data.
Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial markets, Monetary and financial indicators