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Identifying a policymaker’s target: an application to the Bank of Canada

Author

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  • Nicholas Rowe
  • James Yetman

Abstract

We develop a new way to test hypotheses about policymakers’ targets and implement that test for Canadian monetary policy. For example, if the Bank of Canada is targeting a 2 per cent inflation rate, and if the Bank’s instrument takes eight quarters to affect inflation, then deviations of inflation from 2 per cent should be uncorrelated with the Bank’s information set lagged eight quarters. We show that there was a major change in the Bank’s objectives near the time when formal inflation targets were announced and that the Bank has indeed been targeting inflation since then. JEL Code: E52, E61 Identifier une cible du définisseur de politique: une application à la Banque du Canada. Les auteurs développent une nouvelle manière de tester des hypothèses quant aux cibles des définisseurs de politiques, et utilisent ce protocole pour analyser la politique monétaire canadienne. Par exemple, si la Banque du Canada s’est donnée pour cible un taux d’inflation de 2 pour‐cent, et si l’instrument utilisé par la Banque du Canada met huit trimestres à avoir son effet sur le taux d’inflation, alors les déviations de l’inflation autour de 2 pour‐cent ne devraient pas être co‐reliées à l’information disponible aux autorités monétaires quand elle a agi. On montre que il y a eu changement dans les objectifs de la Banque aux environs du moment où les cibles formelles d’inflation ont été annoncées, et que la Banque a de fait ciblé le taux d’inflation depuis.

Suggested Citation

  • Nicholas Rowe & James Yetman, 2002. "Identifying a policymaker’s target: an application to the Bank of Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 35(2), pages 239-256, May.
    • Handle: RePEc:wly:canjec:v:35:y:2002:i:2:p:239-256
    DOI: 10.1111/1540-5982.00129
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    Cited by:

    1. Glenn Otto & Graham Voss, 2009. "Strict and Flexible Inflation Forecast Targets: An Empirical Investigation," Department Discussion Papers 0902, Department of Economics, University of Victoria.
    2. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.
    3. Rodriguez, Gabriel & Rowe, Nicholas, 2007. "Why U.S. money does not cause U.S. output, but does cause Hong Kong output," Journal of International Money and Finance, Elsevier, vol. 26(7), pages 1174-1186, November.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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