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Transparency and the Response of Interest Rates to the Publication of Macroeconomic Data

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    Abstract

    The benefits of transparency - the outcome of the measures taken by the central bank to allow financial markets and economic agents to understand the factors it takes into account in formulating monetary policy - are now widely recognized. These benefits include smoother implementation of monetary policy and increased effectiveness as markets improve their ability to anticipate the Bank's policy decisions and account for them in their operations. How interest rates respond to the publication of macroeconomic data depends on the degree of transparency in monetary policy, as the rates will rise or fall as a reflection of the market's revised expectations. Before the Bank of Canada adopted initiatives to improve transparency, such as the inflation-control targets, the semi-annual publication of the Monetary Policy Report and Updates, and the fixed announcement dates, changes to the overnight rate created some volatility in interest rates, and publishing Canadian macroeconomic data did not appear to have a major impact on rates. This article shows how the Bank of Canada's steps towards greater transparency have increased the impact of Canadian data on short-term interest rates and have improved financial markets' understanding of how monetary policy decisions are taken.

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    Bibliographic Info

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

    Volume (Year): 2002-2003 (2003)
    Issue (Month): Winter ()
    Pages: 29-34

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    Handle: RePEc:bca:bcarev:v:2003:y:2003:i:winter02-03:p:29-34

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    Cited by:
    1. Bernd Hayo & Matthias Neuenkirch, 2009. "Domestic or U.S. News: What Drives Canadian Financial Markets?," MAGKS Papers on Economics 200908, Philipps-Universit├Ąt Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    2. Jason Allen & Darcey McVanel, 2009. "Price Movements in the Canadian Residential Mortgage Market," Working Papers 09-13, Bank of Canada.
    3. Lavan Mahadeva, 2007. "A model of market surprises," Bank of England working papers 327, Bank of England.

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