tailieunhanh - Introducing Multiple Interest Rates in ToTEM

We apply a novel measure of bank competition called the Boone indicator, which is based on the notion that in a competitive market, more efficient companies are likely to gain market shares. Hence, the stronger the impact of efficiency on market shares is, the stronger is competition. Furthermore, by analyzing how this efficiency-market share relationship changes over time, this approach provides a measure which can be employed to assess how changes in competition affect the cost of borrowing for both households and enterprises, and how it affects the pass-through of policy rates into loan and deposit rates | Introducing Multiple Interest Rates in ToTEM José Dorich Rhys R. Mendes and Yang Zhang Canadian Economic Analysis Department Standard dynamic stochastic general-equilibrium DSGE models including the first version of ToTEM typically incorporate a single domestic interest rate. In these models time variation in term premiums and risk spreads is not an important determinant of macroeconomic fluctuations. Empirical evidence suggests that both short- and long-term rates as well as the risk spreads faced by households and firms have significant effects on aggregate demand. The Bank of Canada has developed a new version of ToTEM that incorporates multiple interest rates as well as several other modifications. This new structure allows Bank staff to use ToTEM to study a broader array of policy questions than was previously possible. For example staff recently employed the model to assess the macroeconomic impact of higher requirements for bank capital and liquidity. Until recently in keeping with standard practice in DSGE macroeconomic modelling the Bank of Canada s main model for projection and policy analysis ToTEM had a single domestic interest This short-term rate was treated as the instrument of monetary policy and its current value and expected future path were key determinants of the behaviour of economic agents in the model. However the events of the recent global financial crisis highlighted the role that changes in credit market conditions including risk spreads can play in macroeconomic developments. This has led to accelerated work on multiple interest rate models at the Bank of Canada and elsewhere. This article provides an overview of the introduction of multiple interest rates in ToTEM. Economic models are simplified representations of reality designed to assist the understanding and analysis of economic outcomes. Economists choose the dimensions along which they simplify their models to render them tractable but still useful. Judicious choice of the