|
Abstract:
|
Since monetary policy actions typically affect the economy with a lag, economic forecasts play a central role in guiding central bank policy decisions. The author provides a description of the Bank of Canada's principal projection model for the Canadian economy, the Terms of Trade Economic Model (ToTEM), and describes how the model is used to produce the staff economic projection, including the use of loss-function based monetary-policy rules, the treatment of unobserved expectations and the use of expert judgment. Details of the Bayesian Maximum Likelihood procedure used to estimate ToTEM's structural parameters are also provided. Finally, the author discusses the approach taken to characterizing various forms of model-based uncertainty (additive and non-additive) and to dealing with uncertainty in the context of the staff projection, including the use of Bayesian averaging to develop policy rules that are robust to uncertainty about the true values of the model's structural parameters.
|
