Monetary Policy Behaviour over the Long Run in a Small Open Economy: A Markov-Switching Vector Error-Correction Approach

Ronald Henry Lange

Research in Applied Economics, 2018, vol. 10, issue 3, 69-88

Abstract: This study identifies a long-run equilibrium relationship among important information variables with stochastic trends for monetary policy in Canada. The variables serve as both target policy variables for the domestic macroeconomy and reaction variables to external economic disturbances. The parameters of the cointegrated vector of information variables are found to be quite stable. A Markov-switching cointegrated VAR model captures two stochastic policy regimes with low- and high-variances. The weighting matrix for the error-correction terms for both inflation and output are found to be relatively stable across regimes, while the monetary policy rate is found to exhibit asymmetric behavior with error-correction adjustment only in the current low-variance regime.

Keywords: risk appetite; risk aversion; probability density function of risk aversion; consumption-CAPM; US market; Euler equations; unconditional and conditional models; sensitivity and robustness of results (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:mth:raee88:v:10:y:2018:i:3:p:69-88

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