The Bank of Canada's New Quarterly Projection Model, Part 1. The Steady-State Model: SSQPM

Abstract

This report is the first documenting the Bank of Canada's new model of the Canadian economy, the Quarterly Projection Model (QPM). QPM is used at the Bank of Canada for both economic projections and policy analysis. Here the authors focus on the model's long-run properties, describing SSQPM, a model of the steady state of QPM that is maintained separately and used to study the determinants of long-run equilibrium in the economy and the permanent effects of economic disturbances or changes of policy. SSQPM is based on the simple Blanchard-Weil model with overlapping generations. In such a model, household preferences determine the steady-state level of financial wealth, relative to output. The equilibrium is achieved primarily through variation in the level of net foreign assets. This then determines foreign debt service and the capital account of the balance of payments. Given these "asset" considerations, the current account identities provide the required trade balance, and in SSQPM, the real exchange rate adjusts to ensure that this level of trade is achieved. The authors present the simplest form of such a model and then introduce a series of elaborations and extensions that are judged necessary to support a working projection environment. They then describe the choices made by Bank staff in calibrating the model and the numerical steady state that emerges. Finally, the authors describe the properties of SSQPM, as revealed by its responses to a number of shocks to exogenous variables.

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