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ToTEM III: The Bank of Canada’s Main DSGE Model for Projection and Policy Analysis

Author

Listed:
  • Paul Corrigan
  • Hélène Desgagnés
  • José Dorich
  • Vadym Lepetyuk
  • Wataru Miyamoto
  • Yang Zhang

Abstract

We present a technical description of the second large-scale update to the Terms-of-Trade Economic Model: ToTEM III. This updated version of the model replaced ToTEM II in 2017. ToTEM III's structure includes key aspects of household indebtedness and improved modelling of the housing market. These new features allow Bank staff to address a broader range of economic issues. Moreover, the model is estimated using a Bayesian methodology with informative priors and a larger set of observable variables, including improved measures of the factors explaining non-commodity exports. These enhancements in the model structure and estimation have contributed to significant improvements in the empirical properties of the model. We also compare the new model’s responses to key macroeconomic shocks with those of ToTEM II and explore two important policy applications.

Suggested Citation

  • Paul Corrigan & Hélène Desgagnés & José Dorich & Vadym Lepetyuk & Wataru Miyamoto & Yang Zhang, 2021. "ToTEM III: The Bank of Canada’s Main DSGE Model for Projection and Policy Analysis," Technical Reports 119, Bank of Canada.
    • Handle: RePEc:bca:bocatr:119
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    References listed on IDEAS

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    3. Matteo Iacoviello, 2005. "House Prices, Borrowing Constraints, and Monetary Policy in the Business Cycle," American Economic Review, American Economic Association, vol. 95(3), pages 739-764, June.
    4. Laurence Savoie-Chabot & Mikael Khan, 2015. "Exchange Rate Pass-Through to Consumer Prices: Theory and Recent Evidence," Discussion Papers 15-9, Bank of Canada.
    5. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    6. Sami Alpanda & Gino Cateau & Césaire Meh, 2018. "A policy model to analyze macroprudential regulations and monetary policy," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 51(3), pages 828-863, August.
    7. Guerrieri, Luca & Iacoviello, Matteo, 2017. "Collateral constraints and macroeconomic asymmetries," Journal of Monetary Economics, Elsevier, vol. 90(C), pages 28-49.
    8. Alpanda, Sami & Zubairy, Sarah, 2017. "Addressing household indebtedness: Monetary, fiscal or macroprudential policy?," European Economic Review, Elsevier, vol. 92(C), pages 47-73.
    9. Patrick Alexander & Jean-Philippe Cayen & Alex Proulx, 2017. "An Improved Equation for Predicting Canadian Non-Commodity Exports," Discussion Papers 17-1, Bank of Canada.
    10. Pablo A. Guerrón-Quintana & James M. Nason, 2013. "Bayesian estimation of DSGE models," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 21, pages 486-512, Edward Elgar Publishing.
    11. Rhys R. Mendes, 2014. "The Neutral Rate of Interest in Canada," Discussion Papers 14-5, Bank of Canada.
    12. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.
    13. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
    14. José Dorich & Vadym Lepetyuk & Jonathan Swarbrick, 2018. "Weakness in Non-Commodity Exports: Demand versus Supply Factors," Staff Analytical Notes 2018-28, Bank of Canada.
    15. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    16. Gregory Bauer, 2014. "International House Price Cycles, Monetary Policy and Risk Premiums," Staff Working Papers 14-54, Bank of Canada.
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    Cited by:

    1. Cars Hommes & Mario He & Sebastian Poledna & Melissa Siqueira & Yang Zhang, 2022. "CANVAS: A Canadian Behavioral Agent-Based Model," Staff Working Papers 22-51, Bank of Canada.
    2. Wagner, Joel & Schlanger, Tudor & Zhang, Yang, 2023. "A horse race of alternative monetary policy regimes under bounded rationality," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    3. Marc-André Gosselin & Temel Taskin, 2023. "What Can Earnings Calls Tell Us About the Output Gap and Inflation in Canada?," Discussion Papers 2023-13, Bank of Canada.
    4. Zoundi, Zakaria, 2024. "Wells or Welfare? Macroeconomic implications of the Canadian oil subsidy," Economic Modelling, Elsevier, vol. 139(C).
    5. Fasolo, Angelo M. & Araujo, Eurilton & Jorge, Marcos Valli & Kornelius, Alexandre & Marinho, Leonardo Sousa Gomes, 2024. "Brazilian macroeconomic dynamics redux: Shocks, frictions, and unemployment in SAMBA model," Latin American Journal of Central Banking (previously Monetaria), Elsevier, vol. 5(2).
    6. Joshua Brault, 2024. "Parallel Tempering for DSGE Estimation," Staff Working Papers 24-13, Bank of Canada.
    7. Stefano Gnocchi & Fanny McKellips & Rodrigo Sekkel & Laure Simon & Yinxi Xie & Yang Zhang, 2024. "The Output-Inflation Trade-off in Canada," Discussion Papers 2024-07, Bank of Canada.
    8. Donald Coletti, 2023. "A Blueprint for the Fourth Generation of Bank of Canada Projection and Policy Analysis Models," Discussion Papers 2023-23, Bank of Canada.
    9. Vivian Chu & Yang Zhang, 2022. "Harnessing the benefit of state-contingent forward guidance," Staff Analytical Notes 2022-13, Bank of Canada.
    10. Sarah Burkinshaw & Yaz Terajima & Carolyn A. Wilkins, 2022. "Income Inequality in Canada," Discussion Papers 2022-16, Bank of Canada.
    11. Marc-André Gosselin & Sharon Kozicki, 2023. "Making It Real: Bringing Research Models into Central Bank Projections," Discussion Papers 2023-29, Bank of Canada.
    12. José Dorich & Rhys R. Mendes & Yang Zhang, 2021. "The Bank of Canada’s “Horse Race” of Alternative Monetary Policy Frameworks: Some Interim Results from Model Simulations," Discussion Papers 2021-13, Bank of Canada.
    13. Kerem Tuzcuoglu, 2023. "Risk Amplification Macro Model (RAMM)," Technical Reports 123, Bank of Canada.
    14. Joel Wagner & Tudor Schlanger & Yang Zhang, 2022. "A Horse Race of Alternative Monetary Policy Regimes Under Bounded Rationality," Discussion Papers 2022-4, Bank of Canada.

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    More about this item

    Keywords

    Business fluctuations and cycles; Economic models; Housing; Interest rates; Monetary policy;
    All these keywords.

    JEL classification:

    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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