Transmission of US monetary policy into the Canadian economy: A structural cointegration analysis

Mahdi Barakchian
2015
Economic Modelling,Volume 46, pages 11-26


Abstract:

This paper estimates a two-country model comprising structural cointegrated models of Canada and the US. Using persistence profile analysis, we find that the Term Structure and a modified Fisher equation are maintained in the US model, and, the Term Structure, Fisher equation and Interest Rate Parity are maintained in the Canadian model. Then we use the model to examine the transmission of US monetary policy into the Canadian economy. The results show that the responses of the Canadian macro variables to the US monetary policy shock are very similar to the responses of the US macro variables to the same shock: after a contractionary US monetary policy shock, output falls quickly and shows a U-shaped response, inflation falls with a delay, short-term interest rate jumps and then gradually declines and long-term interest rate increases for one year and then gradually declines. Our results show that interest rate-path-through is the majormechanism by which US monetary policy shocks are transmitted into the Canadian economy


Mahdi Barakchian,Christopher W. Crowe
2013
Journal of Monetary Economics,Volume 60, pages: 950-966

Abstract:

The evidence suggests that monetary policy post 1988 became more forward-looking, invalidating the identifying assumptions in conventional methods of measuring monetary policy's effects, leading to spurious and unlikely results for this period. We propose a new identification scheme that uses factors extracted from Fed Funds futures to measure exogenous changes in policy. Using this shock series in a VAR, we recover the contractionary effect of monetary tightening on output. Moreover, we find that as much as half of the variability in output was driven by monetary policy shocks, and that there is a mild price puzzle


Forecasting the Effects of a Canada–US Currency Union on Output and Prices: A Counterfactual Analysis

Mahdi Barakchian
2013
Journal of Forecasting,Volume 32, Issue 7, pages: 639-653


Abstract:

This paper is a counterfactual analysis investigating the consequences of the formation of a currency union for Canada and the USA: whether outputs increase and prices decrease if these countries form a currency union. We use a two-country cointegrated model to conduct the counterfactual analysis, where the conditional forecasts are generated based on the Gaussian assumption. To deal with structural breaks and model uncertainty, conditional forecasts are generated from different models/estimation windows and the model-averaging technique is used to combine the forecasts. We also examine the robustness of our results to parameter uncertainty using the wild bootstrap method. The results show that forming the currency union would probably boost the Canadian economy, whereas it would not have significant effects on US output or Canadian and US price levels.


Do Long-Run Theory Restrictions Help in Forecasting?

Mahdi Barakchian
2012
Journal of Forecasting,Volume 31, Issue 5, pages: 401-422


Abstract:

Do long-run equilibrium relations suggested by economic theory help to improve the forecasting performance of a cointegrated vector error correction model (VECM)? In this paper we try to answer this question in the context of a two-country model developed for the Canadian and US economies. We compare the forecasting performance of the exactly identified cointegrated VECMs to the performance of the over-identified VECMs with the long-run theory restrictions imposed. We allow for model uncertainty and conduct this comparison for every possible combination of the cointegration ranks of the Canadian and US models. We show that the over-identified structural cointegrated models generally outperform the exactly identified models in forecasting Canadian macroeconomic variables. We also show that the pooled forecasts generated from the over-identified models beat most of the individual exactly identified and over-identified models as well as the VARs in levels and in differences.


Monetary Policy Matters: New Evidence Based on a New Shock Measure

Mahdi Barakchian,Christopher W. Crowe
2010
IMF Working Paper

Abstract:

Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.


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