An Up-to-Date and Improved BVAR Model of the Canadian Economy

Daniel Racette, Jacques Raynauld () and Christian Sigouin ()

Staff Working Papers from Bank of Canada

Abstract: In this paper, we estimate a fully optimized BVAR model of the Canadian economy for the period 1971-87. The model is well-adapted to the features of a small open economy. We show how it can be used as an input in the monetary policy process either as a forecasting instrument or an analytical tool. In general, forecast results over the 1988-92 period compare well with those of univariate autoregressive models. The results from the variance decomposition exercise show a rather weak influence of monetary aggregates on macroeconomic variables, at least in a short-run context. However, foreign variables, particularly commodity prices, play an important role. Dans cette etude, nous presentons l'estimation, pour la periode 1971-1987, d'un modele BVAR de l'economie canadienne particulierement bien adapte aux caracteristiques d'economie ouverte du pays. La methode utilisee permet d'optimiser globalement l'estimation de l'ensemble des hyperparametres du modele. Nous montrons comment le modele peut etre utilise comme outil d'analyse ou de prevision dans le domaine de la politique monetaire. Les resultats des exercices de prevision realises a l'aide du modele se comparent avantageusement a ceux qui sont obtenus pour la meme periode avec des modeles autoregressifs univaries (AR). Par ailleurs, les exercices de decomposition de variances indiquent que les agregats monetaires ont, du moins a court terme, une influence plutot faible sur les grandes variables macroeconomiques, mais que les variables etrangeres, en particulier les prix des denrees de base, jouent un role important.

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Working Paper: An Up-to-Date and Improved BVAR Model of the Canadian Economy (1995)
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