Study of the Unemployment Rate Response to Narrative Monetary Policy Shocks in Canada: A Local Projection Approach with Regional Differences and State-dependency Considered

Abstract

This study explores the state-dependent effects of monetary policy shocks on the Canadian economy at two levels: national and provincial. The study employs the monetary policy shocks identified by Champagne and Sekkel (2018) by narrative approach. The impulse response framework used in the study is local projections (LPs), a widely applied linear regression-based alternative to the standard vector autogression (VAR) framework. The state-dependecy is modelled by both a dummy variable approach and a smooth transition approach. Two economic states are considered: expansion and recession. One major finding is noticeable differences exist across some Canadian provinces as well as between economic states in terms of unemployment response to monetary policy. Sensitivity analyses solidify the result. Key words: impulse response, local projections, state-dependent, monetary policy shocks, unemployment rate, territorial, provincial, long horizon