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When the U.S. catches a cold, Canada sneezes: a lower-bound tale told by deep learning

Author

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  • Lepetyuk, Vadym
  • Maliar, Serguei
Abstract
The Canadian economy was not initially hit by the 2007-2009 Great Recession but ended up having a prolonged episode of the effective lower bound (ELB) on nominal interest rates. To investigate the Canadian ELB experience, we build a "baby" ToTEM model -- a scaled-down version of the Terms of Trade Economic Model (ToTEM) of the Bank of Canada. Our model includes 49 nonlinear equations and 21 state variables. To solve such a high-dimensional model, we develop a projection deep learning algorithm -- a combination of unsupervised and supervised (deep) machine learning techniques. Our findings are as follows: The Canadian ELB episode was contaminated from abroad via large foreign demand shocks. Prolonged ELB episodes are easy to generate with foreign shocks, unlike with domestic shocks. Nonlinearities associated with the ELB constraint have virtually no impact on the Canadian economy but other nonlinearities do, in particular, the degree of uncertainty and specific closing condition used to induce the model's stationarity.

Suggested Citation

  • Lepetyuk, Vadym & Maliar, Serguei, 2019. "When the U.S. catches a cold, Canada sneezes: a lower-bound tale told by deep learning," CEPR Discussion Papers 14025, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:14025
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    More about this item

    Keywords

    Central banking; Totem; Machine learning; Deep learning; Supervised learning; Neural networks; Clustering analysis large-scale model; New keynesian model; Zlb;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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