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Canada-U.S. long-term interest differentials in the 1990s

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Abstract

Long-term Canada-U.S. interest spreads have changed remarkably during the 1990s. The unusually wide spreads of the first half of the decade have given way to an unprecedented run of negative yield differentials. In this article, the author examines the conceptual aspects of yields on international assets and their application to the Canada-U.S. situation. Prior to 1995, investors were unsure that, over the long run, inflation would meet the targets set by the government and the Bank. Policy credibility was undermined by large budget deficits and political uncertainty. In the second half of the decade, confidence was re-established as the fiscal positions of governments improved, long-run price stability became established, and political concerns about Quebec lessened. As long as these fundamentals hold, long-term rates should remain relatively low, even when short-term rates rise.

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Bibliographic Info

Article provided by Bank of Canada in its journal Bank of Canada Review.

Volume (Year): 1998 (1998)
Issue (Month): Spring ()
Pages: 17-38

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Handle: RePEc:bca:bcarev:v:1998:y:1998:i:spring98:p:17-38

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Cited by:
  1. Chinn, Menzie David & Meredith, Guy, 2000. "Interest parity at short and long horizons," SFB 373 Discussion Papers 2000,44, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
  2. Ali Dib, 2011. "Monetary Policy in Estimated Models of Small Open and Closed Economies," Open Economies Review, Springer, vol. 22(5), pages 769-796, November.
  3. James M. Nason and John H. Rogers, 2001. "The Present Value Model of the Current Account Has Been Rejected: Round Up the Usual Subjects," Computing in Economics and Finance 2001 102, Society for Computational Economics.
  4. Michel Normandin & Martin Boileau, 2003. "Dynamics of the Current Account and Interest Differentials," Cahiers de recherche 03-05, HEC Montréal, Institut d'économie appliquée.
  5. Wong, Edwin & Lucia, Kathlyn & Price, Stephanie & Startz, Richard, 2011. "The changing relation between the Canadian and U.S. yield curves," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 965-981, October.
  6. Chinn, Menzie D. & Meredith, Guy, 2000. "Testing uncovered interest parity at short and long horizons," HWWA Discussion Papers 102, Hamburg Institute of International Economics (HWWA).

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