Pierre St-Amant

A Survey of Alternative Methodologies for Estimating Potential Output and the Output Gap

In this paper, the authors survey some of the recent techniques proposed in the literature to measure the trend component of output or potential output. Given the reported shortcomings of mechanical filters and univariate approaches to estimate potential output, the paper focusses on three simple multivariate methodologies: the multivariate Beveridge-Nelson methodology (MBN), Cochranes methodology (CO), and the structural VAR methodology with long-run restrictions applied to output (LRRO). The foundation of these methodologies is first discussed and then applications to U.S. output and consumption data are considered. The LRRO estimates provide significant evidence of a diffusion process for shocks to potential output. This suggests that permanent shocks have more complex dynamics than a random walk, which is the basic assumption of the CO and MBN approaches. However, it is also found that the estimation of the output gap on the basis of an estimated VAR is imprecise, which is consistent with results obtained by Staiger, Stock and Watson (1996) with a different methodology. The spectra of the transitory components (output gaps) resulting from the empirical applications of the CO, MBN and LRRO methodologies differ from one another. Indeed, only the LRRO transitory component has a peak at business-cycle frequencies, i.e., cycles lasting between 6 and 32 quarters.

Revisiting the case for flexible exchange rates in North America

Abstract This paper provides econometric and qualitative evidence that flexible exchange rate regimes have played important roles in stabilising the Canadian and Mexican economies in the face of asymmetric shocks, nominal rigidities, and limited international labour and capital mobility. Empirical evidence from Canada and from the more recent period in Mexico (1995—present) is organised around three propositions: one, the economies of Canada, Mexico, and the United States often experience large asymmetric shocks and the correlation between their business cycles is relatively low; two, exchange rates in Canada and Mexico are primarily driven by macroeconomic fundamentals and adjust appropriately to large asymmetric shocks, which are often caused by commodity price movements; and, three, flexible exchange rates facilitate adjustment to shocks in the underlying fundamentals.

Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology

In this paper, the author uses structural vector autoregression methodology to decompose U.S. nominal interest rates into an expected inflation component and an ex ante real interest rate component. He identifies inflation expectations and ex ante real interest rate shocks by assuming that nominal interest rates and inflation expectations move one-for-one in the long-run - they are cointegrated (1,1) - and that the real interest rate is stationary. He finds that changes in inflation expectations and in the ex ante real interest rate are both important in explaining fluctuations in the U.S. 1-year and 10-year government bond rates. The author also finds that, while the increase in the 1-year and the 10-year bond rates in the 1970s and the early 1980s mainly reflects higher inflation expectations, changes in ex ante real interest rates appear to account for most of the fluctuations in these rates in 1994 and in the first half of 1995.