IDEAS home Printed from https://ideas.repec.org/a/taf/applec/v42y2010i4p439-454.html
   My bibliography  Save this article

Sources of regime switching in short-term interest rates for Canada

Author

Listed:
  • Ronald Lange

Abstract

The purpose of this study is to identify sources of regime switching in short-term interest rates for Canada. The choice of information variables is based on three well-known hypotheses about interest rates: the expectations hypothesis, the Fisher relationship, and the condition for uncovered interest parity. The empirical framework consists of an autoregressive distributive lag (ADL) model in error-correction form with information spreads and a Markov regime-switching estimation methodology. The models choose interest-rate regimes that are similar in many respects to those found for the USA. The different regimes in Canada are driven by movements in the monetary policy rate, the US short-term rate, and the long-term yield. The monetary policy rate is found to trigger very large changes in the short-term rate, responding one-for-one in the high-variance regime and slightly less in the more 'normal' interest-rate regime. Both the US short rate and long-term yield are also found to trigger relatively large changes in short-term rates, but only in the high-variance regime. Inflation, however, is not found to contain additional information about regime switches in interest rates at the short-term horizon.

Suggested Citation

  • Ronald Lange, 2010. "Sources of regime switching in short-term interest rates for Canada," Applied Economics, Taylor & Francis Journals, vol. 42(4), pages 439-454.
  • Handle: RePEc:taf:applec:v:42:y:2010:i:4:p:439-454
    DOI: 10.1080/00036840701630078
    as

    Download full text from publisher

    File URL: http://www.tandfonline.com/doi/abs/10.1080/00036840701630078
    Download Restriction: Access to full text is restricted to subscribers.

    File URL: https://libkey.io/10.1080/00036840701630078?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    2. Sarno, Lucio & Thornton, Daniel L. & Valente, Giorgio, 2007. "The Empirical Failure of the Expectations Hypothesis of the Term Structure of Bond Yields," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 42(1), pages 81-100, March.
    3. Andrew Ang & Geert Bekaert & Min Wei, 2008. "The Term Structure of Real Rates and Expected Inflation," Journal of Finance, American Finance Association, vol. 63(2), pages 797-849, April.
    4. Jamie Armour & Walter Engert & Ben Fung, 1996. "Overnight Rate Innovations as a measure of monetary Policy Shocks in Vector Autoregressions," Staff Working Papers 96-4, Bank of Canada.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
    2. Lange, Ronald H., 2010. "Regime-switching monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 782-796, September.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
    2. Lange, Ronald H., 2010. "Regime-switching monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 782-796, September.
    3. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.
    4. Daniel L. Thornton, 2018. "Greenspan's Conundrum and the Fed's Ability to Affect Long‐Term Yields," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 50(2-3), pages 513-543, March.
    5. Ronald Lange, 2005. "Determinants of the long-term yield in Canada: an open economy VAR approach," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 681-693.
    6. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    7. Ed Westerhout & Ona Ciocyte, 2017. "The role of inflation-linked bonds," CPB Discussion Paper 344, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Marfatia, Hardik A., 2015. "Monetary policy's time-varying impact on the US bond markets: Role of financial stress and risks," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 103-123.
    9. Bekaert, Geert & Engstrom, Eric & Grenadier, Steven R., 2010. "Stock and bond returns with Moody Investors," Journal of Empirical Finance, Elsevier, vol. 17(5), pages 867-894, December.
    10. Mehmet Pasaogullari & Simeon Tsonevy, 2011. "The term structure of inflation compensation in the nominal yield curve," Working Papers (Old Series) 1133, Federal Reserve Bank of Cleveland.
    11. Marcello Pericoli, 2012. "Expected inflation and inflation risk premium in the euro area and in the United States," Temi di discussione (Economic working papers) 842, Bank of Italy, Economic Research and International Relations Area.
    12. Geert Bekaert & Eric Engstrom, 2017. "Asset Return Dynamics under Habits and Bad Environment-Good Environment Fundamentals," Journal of Political Economy, University of Chicago Press, vol. 125(3), pages 713-760.
    13. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2010. "New Keynesian Macroeconomics and the Term Structure," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 33-62, February.
    14. H. Bertholon & A. Monfort & F. Pegoraro, 2008. "Econometric Asset Pricing Modelling," The Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(4), pages 407-458, Fall.
    15. Juha Seppala & Federico Ravenna, 2007. "Monetary Policy, Expected Inflation, and Inflation Risk Premium," 2007 Meeting Papers 513, Society for Economic Dynamics.
    16. Stéphane Guibaud & Yves Nosbusch & Dimitri Vayanos, 2013. "Bond Market Clienteles, the Yield Curve, and the Optimal Maturity Structure of Government Debt," Review of Financial Studies, Society for Financial Studies, vol. 26(8), pages 1914-1961.
    17. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    18. Zhang, Han & Guo, Bin & Liu, Lanbiao, 2022. "The time-varying bond risk premia in China," Journal of Empirical Finance, Elsevier, vol. 65(C), pages 51-76.
    19. Andrew Ang & Marie Brière & Ombretta Signori, 2012. "Inflation and Individual Equities," Post-Print hal-01494500, HAL.
    20. Edda Claus & Mardi Dungey, 2015. "Can monetary policy surprise the market?," CAMA Working Papers 2015-05, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:applec:v:42:y:2010:i:4:p:439-454. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/RAEC20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.