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The Changing Relation Between the Canadian and U.S. Yield Curves

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  • Kathlyn Lucia
  • Stephanie Price
  • Edwin Wong
  • Richard Startz

Abstract

The term structures of Canada and of the United States, two countries with historically close economic ties, have been closely linked. We investigate the link between Canadian and U.S. yield curves and show previously strong correlations between yield curve components dissipate after Canadian monetary policy reforms in the early 1990s. First, the effect is particularly evident in the diminished cross-country correlations of the short term bond yields. Secondly, cross-country yields are cointegrated before the reforms, but not afterwards. Lastly, the results on the term structure are shown using a vector autoregression with an endogenously determined break date for Canadian and U.S. estimates of the three-factor Nelson-Siegel (1987) yield curve model.

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Paper provided by University of Washington, Department of Economics in its series Working Papers with number UWEC-2008-05.

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Date of creation: May 2008
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Handle: RePEc:udb:wpaper:uwec-2008-05

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  1. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-89, October.
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  3. Francis X. Diebold & Glenn D. Rudebusch & S. Boragan Aruoba, 2004. "The Macroeconomy and the Yield Curve: A Dynamic Latent Factor Approach," NBER Working Papers 10616, National Bureau of Economic Research, Inc.
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  15. David J. Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Working Papers 04-48, Bank of Canada.
  16. Ronald Lange, 2005. "Determinants of the long-term yield in Canada: an open economy VAR approach," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 37(6), pages 681-693.
  17. N. Gregory Mankiw, 2001. "U. S. Monetary Policy During the 1990s," Harvard Institute of Economic Research Working Papers 1927, Harvard - Institute of Economic Research.
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  20. Robert R. Bliss, 1996. "Testing term structure estimation methods," Working Paper, Federal Reserve Bank of Atlanta 96-12, Federal Reserve Bank of Atlanta.
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