Sunday, August 16, 2009

Reconciling the Bank of Canada's forecast or the Importance of Exchange Rate Assumptions

In its most recent MPR, the Bank of Canada produced a growth forecast for 2010 that seems rather optimistic compared to some private sector forecasts:

Bank of Canada 3%
Merrill Lynch 2.7%
Bank of Nova Scotia 2.5%
Royal Bank of Canada 2.5%
Shock Minus Control 2.5%
Bank of Montreal 1.8%
CIBC 1.5%
Toronto-Dominion Bank 1.4%

One probable reason for the variance between my forecast and the Bank’s is the Bank's assumption of an 87 cent US/CAD exchange rate versus my model range of 87 to 95 cents. Indeed, I can account for quite a bit of the variance between my own forecast and the Bank's simply by tweaking the exchange rate assumption.

Of course, there any number or assumptions that could be driving this difference, particularly within a complex model such as TOTEM, the Bank’s primary forecasting model. However, the low exchange rate assumption does seem to be a pretty important one.


Stephen Gordon said...

How do the forecasts compare over 2009? Is it the case the the Bank is forecasting a deeper trough, so the sharper growth is simply a bounce back up to the levels that everyone else is forecasting?

Maybe a graph of the forecasted paths of the levels of GDP might show things that are being masked by taking the differences.

Shock Minus Control said...

No - the Bank is pretty optimistic about the back half of 2009 with Q2: -3.5%, Q2: 1.3% and Q4: 3%.

Stephen Gordon said...

Ah. Thanks.