Bernd Hayo () (Faculty of Business Administration and Economics, Philipps-University Marburg) Matthias Neuenkirch () (Faculty of Business Administration and Economics, Philipps-University Marburg)
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We explain changes in the Canadian target rate using macroeconomic variables as well as Bank of Canada (BOC) and Federal Reserve Bank (Fed) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to explain and predict 60 target rate decisions between 1998 and 2006. We find that that speeches and testimonies by Canadian Governing Council members have a statistically significant impact, whereas the less frequent monetary policy reports are insignificant. These communication variables significantly explain target rate changes but have no additional explanatory power over a standard Taylor rule. Prior to the introduction of Fixed Announcement Dates, BOC communication contained more information on upcoming policy moves. Communications by the U.S. Federal Reserve Bank—which are much more frequent—outperform our Canadian communication indicators in explaining Canadian target rate decisions. We conclude that if the BOC is interested in improving the predictability of its monetary policy decisions, it should follow the Fed and use informal types of communication more frequently.
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Paper provided by Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) in its series MAGKS Papers on Economics with number
200935.
Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
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