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Structural Models in Real Time
This paper outlines a simple approach for incorporating extraneous predictions into structural models. The method allows the forecaster to combine predictions derived from any source in a way that is consistent with the underlying structure of the model. The method is flexible enough that predictions can be up-weighted or down-weighted on a case-by-case basis. We illustrate the approach using a small quarterly structural and real-time data for the United States.
Towards Macroprudential Stress Testing
Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomi...
How to Improve Inflation Forecasting in Canada
Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.
The Global Financial Crisis
The global financial crisis was a stark reminder of the importance of cross-country linkages in the global economy. We document growth synchronization across a diverse group of 185 countries covering 7 regions, and pay particular attention to the period around the global financial crisis. A dynamic factor model is used to decompose each country’s growth into contributions from global, regional, and idiosyncratic shocks. We find a high degree of global synchronization over 1990 to 2011, particularly across advanced economies. Examining the period around the global financial crisis, we find global shocks had large and widespread effects on growth, with more diversity in growth experiences in the early part of the recovery. In a recursive experiment, we find rising global growth synchronization just prior to the crisis, largely resulting from a shift in the importance of global shocks between countries. In contrast, the crisis period caused a much more widespread increase in growth synchronization, and was followed by a similarly pervasive decrease in synchronization in the early recovery.
New Indicators for Tracking Growth in Real Time
We develop monthly indicators for tracking growth in 32 advanced and emerging-market economies. We test the historical performance of our indicators and find that they do a good job at describing the business cycle. In a recursive out-of-sample forecasting exercise, we find that the indicators generally produce good GDP growth forecasts relative to a range of time series models.
Balancing Financial Stability and Housing Affordability: The Case of Canada
Housing market imbalances are a key source of systemic risk and can adversely affect housing affordability. This paper utilizes a stylized model of the Canadian economy that includes policymakers with differing objectives—macroeconomic stability, financial stability, and housing affordability. Not surprisingly, when faced with multiple objectives, deploying more policy instruments can lead to better outcomes. The results show that macroprudential policy can be more effective than policies based on adjusting propertytransfer taxes because property-tax policy entails excessive volatility in tax rates. They also show that if property-transfer taxes are used as a policy instrument, taxes targeted at a broader-set of homebuyers can be more effective than measures targeted at a smaller subset of homebuyers, such as nonresident homebuyers.
Fiscal Multipliers for Brazil
We find historical fiscal multipliers for Brazil around 0.5, larger than what existing literature typically identifies for the average emerging market. However, spending and public credit multipliers seem to have dropped to near zero since the global financial crisis, as the estimate for the whole sample period (1999-2014) is about 1⁄2 of that for precrisis years. By contrast, revenue multipliers have remained broadly stable. We conclude that fiscal consolidations based on expenditure and public credit retrenchment are likely to entail a modest drag on growth in the near term.
Financial Conditions Indexes for the United States and Euro Area
Financial conditions indexes are developed for the United States and euro area using a wide range of financial indicators and a dynamic factor model. The financial conditions indexes are shown to be useful for forecasting economic activity and have good revision properties.
NAFTA to USMCA: What is Gained?
The United States – Mexico – Canada Agreement (USMCA) was signed on November 30, 2018 and aims to replace and modernize the North-American Free Trade Agreement (NAFTA). This paper uses a global, multisector, computable-general-equilibrium model to provide an analytical assessment of five key provisions in the new agreement, including tighter rules of origin in the automotive, textiles and apparel sectors, more liberalized agricultural trade, and other trade facilitation measures. The results show that together these provisions would adversely affect trade in the automotive, textiles and apparel sectors, while generating modest aggregate gains in terms of welfare, mostly driven by improved goods market access, with a negligible effect on real GDP. The welfare benefits from USMCA would be greatly enhanced with the elimination of U.S. tariffs on steel and aluminum imports from Canada and Mexico and the elimination of the Canadian and Mexican import surtaxes imposed after the U.S. tariffs were put in place.
Normalization of Global Financial Conditions
Global financial conditions are poised to tighten further as the global recovery proceeds. While monetary policy normalization should be a healthy global development as growth continues to recover in advanced economies, financial spillovers seen during the taper episode—which started with the announcement in May 2013 of possible tapering of U.S. asset purchases—hint at potential challenges for Brazil. The Fed’s communications related to normalization have improved significantly since the taper episode and, at present, a rise in Fed Funds rate in 2015 is widely anticipated by markets—arguably the most widely anticipated tightening of monetary policy in history. While Brazil could benefit from tighter global financial conditions associated with improved global prospects, bouts of heightened uncertainty about the future course of monetary policy cannot be ruled out. Thus, the correct diagnosis of the underlying reasons behind tighter global financial conditions remains crucially important for Brazil. Adverse spillovers can be mitigated by strengthening policy frameworks and fundamentals.
