The Bank of Canada's New Quarterly Projection Model, Part 3. The Dynamic Model: QPM

The Bank of Canada's new Quarterly Projection Model, QPM, combines the short-term dynamic properties necessary to support regular economic projections with the consistent behavioural structure necessary for policy analysis. The theoretical underpinnings of the model and the properties of its dynamically stable steady state are described in the first volume of this series. In this third volume, the authors review the history of macro modelling at the Bank and how that history has conditioned the nature of QPM and the methodology used in its construction. They then describe the model, focussing on the types of shocks it was designed to handle and the key elements of its dynamic structure. Two important features of that dynamic structure are forward-looking expectations and endogenous policy rules. Unlike previous Bank models, QPM is not estimated; rather, it is calibrated to reflect the Canadian data. The authors discuss the methodology of calibration and provide examples of how it was done for QPM. Finally, they illustrate QPM's properties in dynamic simulation by describing the results of numerous shocks to the model.