ToTEM: The Bank of Canada's New Quarterly Projection Model

Stephen Murchison · Andrew Rennison

153 citations0/0 files storedRePEc: Research Papers in Economics

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Monetary Policy and Economic Impact Economic Theory and Policy Economic theories and models

Abstract

The authors provide a detailed technical description of the Terms-of-Trade Economic Model (ToTEM), which replaced the Quarterly Projection Model (QPM) in December 2005 as the Bank's principal projection and policy-analysis model for the Canadian economy. ToTEM is an open-economy, dynamic stochastic general-equilibrium model that contains producers of four distinct finished products: consumption goods and services, investment goods, government goods, and export goods. ToTEM also contains a commodity-producing sector. The behaviour of almost all key variables in ToTEM is traceable to a set of fundamental assumptions about the underlying structure of the Canadian economy. This greatly improves the model's ability to tell coherent, internally consistent stories about the current evolution of the Canadian economy and how it is expected to evolve in the future. In addition, ToTEM's multiple-goods approach enables the Bank to gain insight into a much wider variety of shocks, including relative-price shocks. In particular, ToTEM is better equipped to handle terms-of-trade shocks, such as those stemming from movements in world commodity prices. But ToTEM does not mark a radical departure from QPM's design philosophy; rather, it should be regarded as the next step in the evolution of openeconomy macro modelling at the Bank. Indeed, ToTEM adopts most of the features that distinguished QPM from its predecessors, including a well-defined steady state, an explicit separation of intrinsic and expectational dynamics, an endogenous monetary policy rule, and an emphasis on the economy's supply side. However, ToTEM extends this basic framework, allowing for optimizing behaviour on the part of households and firms, both in and out of steady state, in a multi-product environment.

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References

2005INTEREST AND PRICES: FOUNDATIONS OF A THEORY OF MONETARY POLICY 1980Aggregate Dynamics and Staggered Contracts 2002Closing Small Open Economy Models 1988Production, growth and business cycles 1997The New Neoclassical Synthesis and the Role of Monetary Policy 2005Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach 1995Terms of trade and real exchange rates: the Canadian evidence

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