When the U.S. Catches a Cold, Canada Sneezes: A Lower-Bound Tale Told by Deep Learning

54 Pages Posted: 7 Oct 2019 Last revised: 2 Mar 2020

See all articles by Vadym Lepetyuk

Vadym Lepetyuk

Universidad de Alicante; Government of Canada - Bank of Canada

Lilia Maliar

CUNY The Graduate Center - Department of Economics

Serguei Maliar

Santa Clara University

Date Written: September 2019

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.

Keywords: central banking, clustering analysis large-scale model, deep learning, Machine Learning, neural networks, New Keynesian Model, supervised learning, ToTEM, ZLB

JEL Classification: C61, C63, C68, E31, E52

Suggested Citation

Lepetyuk, Vadym and Maliar, Lilia and Maliar, Serguei, When the U.S. Catches a Cold, Canada Sneezes: A Lower-Bound Tale Told by Deep Learning (September 2019). CEPR Discussion Paper No. DP14025, Available at SSRN: https://ssrn.com/abstract=3464570

Vadym Lepetyuk (Contact Author)

Universidad de Alicante ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, Alicante 03690
Spain

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Lilia Maliar

CUNY The Graduate Center - Department of Economics ( email )

365 Fifth Avenue, 5th Floor
New York, NY 10016
United States

Serguei Maliar

Santa Clara University ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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