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Understanding Monetary Policy and its Effects: Evidence from Canadian Firms Using the Business Outlook Survey

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  • Matthieu Verstraete
  • Lena Suchanek

Abstract

Using real time data, we show that the monetary policy rule in Canada is better described by a Taylor rule augmented with business sentiment which is captured in survey data. Stronger survey results are correlated with a significantly higher policy rate over the period of study (2001–18). Taylor rules including a measure of business sentiment have significantly better predictive accuracy. Using these modified Taylor rules in vector autoregressions and data from the Bank of Canada’s quarterly Business Outlook Survey, we study the impact of monetary policy on firms’ expectations of sales and prices, financing conditions and investment decisions. Given our short sample, we focus on estimates of firms’ responses to monetary shocks obtained by local projections (Jordà 2005). A 100-basis-point shock in the Bank’s target rate leads firms to expect significantly lower sales and slower output price growth, report tighter credit conditions and lower investment intentions. Results are robust to using Champagne and Sekkel’s (2018) new monetary policy measure.

Suggested Citation

  • Matthieu Verstraete & Lena Suchanek, 2018. "Understanding Monetary Policy and its Effects: Evidence from Canadian Firms Using the Business Outlook Survey," CESifo Working Paper Series 7221, CESifo.
    • Handle: RePEc:ces:ceswps:_7221
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    References listed on IDEAS

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    1. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    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. Alan J. Auerbach & Yuriy Gorodnichenko, 2012. "Fiscal Multipliers in Recession and Expansion," NBER Chapters, in: Fiscal Policy after the Financial Crisis, pages 63-98, National Bureau of Economic Research, Inc.
    4. Nicoletta Batini & Andrew Haldane, 1999. "Forward-Looking Rules for Monetary Policy," NBER Chapters, in: Monetary Policy Rules, pages 157-202, National Bureau of Economic Research, Inc.
    5. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
    6. Daniel de Munnik & Mark Illing & David Dupuis, 2013. "Assessing the accuracy of non-random business conditions surveys: a novel approach," Journal of the Royal Statistical Society Series A, Royal Statistical Society, vol. 176(2), pages 371-388, February.
    7. Michael Ehrmann, 2005. "Firm Size and Monetary Policy Transmission — Evidence from German Business Survey Data," Contributions to Economics, in: Jan-Egbert Sturm & Timo Wollmershäuser (ed.), Ifo Survey Data in Business Cycle and Monetary Policy Analysis, pages 145-172, Springer.
    8. Dean Croushore, 2011. "Frontiers of Real-Time Data Analysis," Journal of Economic Literature, American Economic Association, vol. 49(1), pages 72-100, March.
    9. 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.
    10. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, February.
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    Cited by:

    1. Pang, Ke & Shiamptanis, Christos, 2024. "Is the Bank of Canada concerned about inflation or the state of the economy?," Journal of International Money and Finance, Elsevier, vol. 140(C).

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    More about this item

    Keywords

    firm dynamics; transmission of monetary policy; interest rates;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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