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Determinants of the long-term yield in Canada: an open economy VAR approach

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  • Ronald Lange
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    Abstract

    This study analyses the economic determinants of short- and long-term interest rates in Canada using a structural vector autoregressive (VAR) model. The VAR takes into consideration that Canadian financial markets are small and open relative to those in the USA and that Canada is a relatively large exporter of commodities. In part, the empirical results for Canada are similar to those for the USA. Aggregate demand shocks have relatively large and persistent effects on long-term yields, while aggregate supply shocks do not have significant effects. However, monetary policy shocks in Canada are found to have larger and more persistent effects on long-term yields than those found for the USA. The most striking result is that movements in US monetary policy have relatively large, significant and persistent effects on Canadian long-term bond yields. Furthermore, US monetary policy disturbances can account for the overall trend in long-term yields in Canada.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 6 ()
    Pages: 681-693

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    Handle: RePEc:taf:applec:v:37:y:2005:i:6:p:681-693

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    1. Campbell, John & Shiller, Robert, 1987. "Cointegration and Tests of Present Value Models," Scholarly Articles 3122490, Harvard University Department of Economics.
    2. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    3. David O. Cushman & Tao Zha, 1995. "Identifying monetary policy in a small open economy under flexible exchange rates," Working Paper 95-7, Federal Reserve Bank of Atlanta.
    4. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
    5. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
    6. Christopher A. Sims & Tao Zha, 1995. "Error bands for impulse responses," Working Paper 95-6, Federal Reserve Bank of Atlanta.
    7. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series WP-01-16, Federal Reserve Bank of Chicago.
    8. Campbell R. Harvey, 1997. "The Relation between the Term Structure of Interest Rates and Canadian Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 169-93, February.
    9. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    10. Campbell, John Y & Shiller, Robert J, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Review of Economic Studies, Wiley Blackwell, vol. 58(3), pages 495-514, May.
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    Cited by:
    1. Sonali Jain-Chandra & D. Filiz Unsal, 2012. "The Effectiveness of Monetary Policy Transmission Under Capital Inflows," IMF Working Papers 12/265, International Monetary Fund.
    2. Gunji, Hiroshi & Miura, Kazuki & Yuan, Yuan, 2009. "Bank competition and monetary policy," Japan and the World Economy, Elsevier, vol. 21(1), pages 105-115, January.
    3. Kathlyn Lucia & Stephanie Price & Edwin Wong & Richard Startz, 2008. "The Changing Relation Between the Canadian and U.S. Yield Curves," Working Papers UWEC-2008-05, University of Washington, Department of Economics.
    4. Todd Potts & David Yerger, 2010. "Variations Across Canadian Regions in the Sensitivity to U.S. Monetary Policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(4), pages 443-454, December.

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