The Canadian Sector of the Multi-Country Model

Abstract

The quarterly econometric model of Canada described in this paper is based on the prototype model of MCM presented in previous papers and in the forthcoming book, Ths U.S. Economy in an Interdependent World. Few departures from prototype specification were required to represent the functioning of the Canadian economy. The most critical areas for adaptation of the prototype to Canada lay in the financial sector. The Canadian financial system is characterized by close linkage to U.S. financial markets. Condsequently, Canadian interest rates have traditionally moved closely with U.S. interest rates. Because of this linkage, the Bank of Canada, in its RDX2 models, chose to model the process of interst rate determination by postulating a central bank reaction function for the short-term interest rate. Thus, the application of the MCM prototype to Canada represents a departure from accepted procedure for an influential group of Canadian modelers and merits further discussion. The first part of this paper reviews the model's financial sector. The second and third parts present dynamic simulation results and selected multiplier responses that characterize the Canadaian model.