Prepared by Tamim Bayoumi and Vladimir Klyuev.
Variables included the annualized quarterly change in the CPI, in percent (π); the overnight interest rate, in percent (i); and the output gap calculated by the Bank of Canada in percent of potential real GDP (y). The model was estimated using GMM, with a constant term and four lags of the model variables as instruments. The transition years 1990-91 were eliminated from the sample.
The inflation coefficient in the pre-IT monetary policy rule was estimated below one, violating the Taylor principle and making the model dynamically unstable. In simulations, a value of 1.2 was imposed on that coefficient. Moreover, the output gap coefficient in the IT monetary policy rule—which is negative but insignificant—was set to zero in the simulations.