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International Interest Rate Differentials: The Interaction with Fiscal and Monetary Variables, and the Business Cycle

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Abstract

Adapting Den Haan's (1996) methodology based on VARs, this paper documents stylized facts about various deviations from international no arbitrage conditions between Canada and the United States. The calculated statistics provide important information about the dynamics of the economic variables that is lost when the focus is solely on unconditional correlation coefficients. In particular, we find that a higher public debt path and slower economic growth in Canada are associated with higher real interest rates in that country relative to that of the US. These results may suggest that international interest rate differentials reflect, at least in part, a risk premium. À l'aide d'une méthodologie adaptée de Den Haan (1996) basée sur les VAR, cette étude documente des régularités empiriques relativement à diverses déviations par rapport aux conditions internationales de non-arbitrage entre le Canada et les États-Unis. Les statistiques calculées fournissent de l'information pertinente, à propos de la dynamique entre les variables économiques, qui auraient été masquée en examinant uniquement des coefficients de corrélations non conditionnelles. En particulier, nous trouvons qu'un taux d'endettement public plus élevé et une croissance économique plus faible sont associés avec des taux d'intérêt réels plus élevés relativement aux taux américains. Ces résultats peuvent suggérer que les différentiels de taux d'intérêt reflètent, du moins en partie, une prime de risque.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 56.

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Length: 42 pages
Date of creation: Apr 1997
Date of revision: Jan 1998
Handle: RePEc:cre:crefwp:56

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Cited by:
  1. Bin, Feng-Shun & Morris, Gay B. & Chen, Dar-Hsin, 2003. "Effects of exchange-rate and interest-rate risk on ADR pricing behavior," The North American Journal of Economics and Finance, Elsevier, vol. 14(2), pages 241-262, August.
  2. Alain Paquet, 1998. "Prudence fiscale, indicateurs d'endettement et évolution de l'état des finances des administrations publiques au Canada," Cahiers de recherche CREFE / CREFE Working Papers 59, CREFE, Université du Québec à Montréal.
  3. Vincent Bouvatier, 2004. "Crise de change et politique monétaire optimale dans un modèle de troisième génération : le rôle de la prime de risque," Cahiers de la Maison des Sciences Economiques bla04089, Université Panthéon-Sorbonne (Paris 1).

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