An Econometric Model of Canadian Monetary Policy Over the 1970s

THE LAST DECADE HAS WITNESSED the emergence of the Bank of Canada as a key participant in the arena of policy formation. Indeed the high profile of the governor and the bank has given rise to a considerable amount of discussion and debate over Canadian monetary policy in both the popular media and academic journals. I To a large extent, this analysis has been essentially descriptive, being based upon casual observations rather than a tightly formulated econometric model. From the viewpoint of understanding the Canadian economy over the 1970s, there is a growing need to establish empirically the mechanisms of monetary policy in Canada and to determine its impact upon such macroeconomic variables as real output. The purpose of this paper is to specify and to estimate a simple model of Canadian monetary policy over the seventies. The model's focus is upon several prominent institutional details that are special to the operation of Canadian monetary policy. Accordingly, the model reflects the practice of the Bank of Canada in setting nominal interest rates and allowing the nominal money supply to be demand determined. This modeling necessarily leads to an examination of the role and effects of the money targets adopted by the Bank of Canada since 1975