Monetary policy

• Behavioral Learning Equilibria in New Keynesian Models

  Staff Working Paper 2022-42 Cars Hommes, Kostas Mavromatis, Tolga Özden, Mei Zhu

  We introduce behavioral learning equilibria (BLE) into DSGE models with boundedly rational agents using simple but optimal first order autoregressive forecasting rules. The Smets-Wouters DSGE model with BLE is estimated and fits well with inflation survey expectations. As a policy application, we show that learning requires a lower degree of interest rate smoothing.

  Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Economic models, Inflation and prices, Monetary policy JEL Code(s): C, C1, C11, D, D8, D83, D84, E, E3, E6, E62

• How does the Bank of Canada’s balance sheet impact the banking system?

  Staff Analytical Note 2022-12 Daniel Bolduc-Zuluaga, Brad Howell, Grahame Johnson

  We examine how changes in the Bank of Canada’s balance sheet impact the banking system. Quantitative easing contributed to an increase in the size of the banking system’s balance sheet and an improvement in bank liquidity coverage ratios. Quantitative tightening is expected to partially reverse these impacts. The banking system will have to adjust its liquidity management strategy in response.

  Content Type(s): Staff research, Staff analytical notes Topic(s): Financial institutions, Financial stability, Monetary policy JEL Code(s): E, E5, E51, G, G2, G21, G23, G3, G32

• The Central Bank’s Dilemma: Look Through Supply Shocks or Control Inflation Expectations?

  Staff Working Paper 2022-41 Paul Beaudry, Thomas J. Carter, Amartya Lahiri

  When countries are hit by supply shocks, central banks often face the dilemma of either looking through such shocks or reacting to them to ensure that inflation expectations remain anchored. In this paper, we propose a tractable framework to capture this dilemma and then explore optimal policy under a range of assumptions about how expectations are formed.

  Content Type(s): Staff research, Staff working papers Topic(s): Central bank research, Economic models, Inflation and prices, Monetary policy, Monetary policy and uncertainty, Monetary policy communications JEL Code(s): E, E1, E12, E2, E24, E3, E31, E5, E52, E58, E6, E65