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I would like to thank Christopher Towe, Tamim Bayoumi, Ian Christensen, Francisco Covas and Calvin Schnure for helpful comments and suggestions. All remaining errors are my own.
The exogenous variables included are U.S. GDP and federal funds rate, and an index of world commodity prices.
Although the overnight rate is the Bank of Canada monetary policy instrument, and the best variable to summarize the monetary policy stance (Fung and Yuan, 2000), it is rather unstable in the first part of the sample. Thus, we use the T-bill rate that is highly correlated with the overnight rate, and is also the variable used in several EU studies that will serve as comparisons to the Canada case.
The variables included were: total loans to businesses and households; securities (bond, equities and commercial paper), and ratios that micro studies have found relevant for the credit channel (such as the ratio of commercial paper to business loans; see Kashyap and Stein, 1994). The price variables included spreads on loans, commercial paper and bonds, as well as stock and housing prices (and an aggregate asset price index, with equal weights of both of them).
The relatively small sample does not provide the degrees of freedom necessary to perform continuous break tests and let the data show the true break point. Tests for an intermediate date, 1991:1, reported in Table 3, yield results that are qualitatively similar to those of the second break test.
A similar pattern arises for the different components of aggregate demand: private consumption falls smoothly but persistently between the 4th and 10th quarters, investment falls three times as much as consumption, and residential investment falls more than total investment. In the second sub sample, residential investment falls significantly during the first year only (despite the mild response in GDP), and several of the results are statistically insignificant.
Bank loans are implicit contracts that allow for more flexibility in renegotiation and risk sharing, features that are not necessarily reflected in market prices or interest rates (Allen and Gale, 2000).
Typical New Keynesian models of monetary policy also include a Phillips curve (or aggregate supply) and interest rate equations (Clarida, Gali, and Gertler, 1999).
The output gap is defined as the ratio of actual GDP to a Hodrick-Prescott filtered version of the same series; the inflation rate is the same period change in the GDP deflator.
Estrella (2002) makes the coefficient α3 a function of the degree of securitization of mortgage loans only. For the United States, he finds that the elasticity of the gap to the real interest rate falls as the degree of mortgage securitization increases, and interprets the result as a decline in the efficacy of monetary policy.
The coefficients on the output lags do not seem to be affected by the disintermediation variables.
For the average values of the variables DIF1 and DIF2, the interest elasticity coefficients become -0.33 and -0.46, respectively. However, for their current values, the coefficients are not very different from zero.
Results are available upon request.
Since the forward-looking component of the output gap generates a high degree of unexplained autocorrelation and a non-significant interest rate elasticity, a version with two lags of the Canadian output gap was estimated. The U.S. GDP measure of potential output is a Hodrick-Prescott filter of GDP until 1980, and staff estimates afterwards.
When calculated using the average sample values of DIF1 and DIF2 both elasticities are respectively -0.15 and -0.09, respectively.