Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada

Abstract: Using narrative evidence with a novel database of real-time data and forecasts from the Bank of Canada’s staff projections (1974–2015), we construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. We show it is crucial to account for the break in the conduct of monetary policy caused by the announcement of inflation targeting in 1991. A 100-basis-point increase in our new shock series leads to a 1.0 percent peak decrease in real GDP and a 0.5 percent fall in the price level, while not accounting for the break leads to a persistent decrease in GDP and a price puzzle. Albeit the change in monetary regime, the effects of monetary policy have not changed much before and after IT.