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Using Functional Shocks to Assess Conventional and Unconventional Monetary Policy in Canada

Author

Listed:
  • Thorsten V. Koeppl
  • Jeremy M Kronick

    (C.D. Howe Insitute)

  • James McNeil

    (Dalhousie University)

Abstract

We develop a new series of Canadian monetary policy shocks and analyze their impact on inflation and real GDP from 1996–2020. Our shocks are constructed as the daily change in the Nelson-Siegel yield curve factors after a monetary policy announcement. Because these shocks include information along the entire yield curve, they provide a more comprehensive view of Canadian monetary policy relative to the existing literature, which focuses on shocks to the short-run interest rate. We document that monetary policy shocks often twist the yield curve, which tends to make monetary policy less effective. Furthermore, we find that lower real interest rates have muted the overall impact of monetary policy over time. Looking at particular episodes, there is little evidence that forward guidance or quantitative easing had a significant impact on inflation or real GDP.

Suggested Citation

  • Thorsten V. Koeppl & Jeremy M Kronick & James McNeil, 2023. "Using Functional Shocks to Assess Conventional and Unconventional Monetary Policy in Canada," Working Paper 1499, Economics Department, Queen's University.
    • Handle: RePEc:qed:wpaper:1499
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    File URL: https://www.econ.queensu.ca/sites/econ.queensu.ca/files/wpaper/qed_wp_1499.pdf
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    Keywords

    Monetary Policy Shocks; Canada; Yield Curve; Local Projections; Unconventional Monetary Policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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