Exploring inflation dynamics in Canada: A threshold vector autoregressive approach

Abstract

Given the pivotal role of inflation expectations in contemporary monetary policy, we posit that if monetary policy has effectively influenced inflation expectations, thereby altering the trajectory of total inflation, a structural break in the path of total inflation should be observable. Conversely, if inflation expectations have remained stable and monetary policy has had limited impact, a stable vector autoregressive (VAR) model should adequately describe the path of total inflation. To address these hypotheses, a non-linear specification of a threshold vector autoregressive (TVAR) model is employed, offering a comprehensive analytical framework for the examination of these dynamics.