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Estimation of the Taylor Rule for Canada Under Multiple Structural Changes

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  • Gabriel Rodriguez

    (Department of Economics, University of Ottawa)

Abstract

The Taylor rule is estimated under the period 1963Q2 to 1999Q4 using Canadian data and the methodology proposed by Bai and Perron (1998) to estimate regression models with multiple endogenous breaks. Although monetary rules are notorious for suffering from structural instability, recent attempts at modeling it are only considering exogenous breaks which are imposed on the data generating process (e.g. Judd and Rudebusch, 1998; and Clarida, Galí and Gertler, 2000). We show that the monetary rule cannot be evaluated over this period without taking into account parameter instability and structural changes, re- flecting changes in monetary policy preferences. Infation is modeled as a Markov-Switching (MS) process to extract expectations, which we treat as the implicit infation target. To extract the potential level of output, we also use a MS process. Modeling the rule when allowance for two breaks is made (1978Q3 and 1988Q2) illustrates well the changing policy preferences of the Bank of Canada.

Suggested Citation

  • Gabriel Rodriguez, 2001. "Estimation of the Taylor Rule for Canada Under Multiple Structural Changes," Working Papers 0107E, University of Ottawa, Department of Economics.
    • Handle: RePEc:ott:wpaper:0107e
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    References listed on IDEAS

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    10. Miyagiwa, Kaz & Ohno, Yuka, 2002. "Uncertainty, spillovers, and cooperative R&D," International Journal of Industrial Organization, Elsevier, vol. 20(6), pages 855-876, June.
    11. Carl Davidson & Paul Segerstrom, 1998. "R&D Subsidies and Economic Growth," RAND Journal of Economics, The RAND Corporation, vol. 29(3), pages 548-577, Autumn.
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    Cited by:

    1. Fan, Longzhen & Yu, Yihong & Zhang, Chu, 2011. "An empirical evaluation of China's monetary policies," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 358-371, June.
    2. Kuzin, Vladimir, 2006. "The inflation aversion of the Bundesbank: A state space approach," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1671-1686.
    3. Vladimir Kuzin, 2004. "The Inflation Aversion of the Bundesbank: A State Space Approach," Computing in Economics and Finance 2004 121, Society for Computational Economics.
    4. Cevik, Emrah Ismail & Dibooglu, Sel & Kutan, Ali M., 2014. "Monetary and fiscal policy interactions: Evidence from emerging European economies," Journal of Comparative Economics, Elsevier, vol. 42(4), pages 1079-1091.
    5. Frédérick Demers, 2003. "The Canadian Phillips Curve and Regime Shifting," Staff Working Papers 03-32, Bank of Canada.

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    More about this item

    Keywords

    Taylor Rule; Markov-SwitchingModels; Structural Change; Unit Root; Inflation; Interest Rate; Output Gap.;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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