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The changing relation between the Canadian and U.S. yield curves

Author

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

Abstract

The term structures of Canada and of the United States, two countries with historically interdependent 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. We attribute the separated ties to the adoption of explicit inflation targets in 1991 and the maintenance of credibility in price stability as a central policy goal by the Bank of Canada. The effect is particularly evident in the diminished cross-country correlations of the short term bond yields. Additionally, there exists strong evidence of cointegration before the reforms, evidence which weakens after the policy change date. 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 and Siegel (1987) yield curve model.

Suggested Citation

  • Wong, Edwin & Lucia, Kathlyn & Price, Stephanie & Startz, Richard, 2011. "The changing relation between the Canadian and U.S. yield curves," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 965-981, October.
  • Handle: RePEc:eee:jimfin:v:30:y:2011:i:6:p:965-981
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    References listed on IDEAS

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    Cited by:

    1. Levant, Jared & Ma, Jun, 2016. "Investigating United Kingdom's monetary policy with Macro-Factor Augmented Dynamic Nelson–Siegel models," Journal of Empirical Finance, Elsevier, vol. 37(C), pages 117-127.
    2. Alexey Akimov & Simon Stevenson & Maxim Zagonov, 2015. "Public Real Estate and the Term Structure of Interest Rates: A Cross-Country Study," The Journal of Real Estate Finance and Economics, Springer, vol. 51(4), pages 503-540, November.

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