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The Canadian macroeconomy and the yield curve: A dynamic latent factor approach

  • Lange, Ronald H.
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    This study estimates a dynamic latent factor model of the yield curve for Canada using a newly constructed data series on the term structure of constant-maturity, zero-coupon interest rates. The state-space representation of the model is used to assess the dynamic interaction between three latent yield-curve factors (level, slope, and curvature) and key macroeconomic variables (real activity, inflation, and the monetary policy instrument). The estimates support both strong macroeconomic effects on the future yield curve and yield-curve effects on future macroeconomic developments. The bidirectional causality is much stronger than that found in the research for the United States.

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    File URL: http://www.sciencedirect.com/science/article/pii/S1059056012001207
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    Article provided by Elsevier in its journal International Review of Economics & Finance.

    Volume (Year): 27 (2013)
    Issue (Month): C ()
    Pages: 261-274

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    Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:261-274
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620165

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    8. Lange, Ronald H., 2010. "Regime-switching monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 782-796, September.
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    19. 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.
    20. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Staff Working Papers 97-10, Bank of Canada.
    21. Kostas Tsatsaronis & Frank Smets, 1997. "Why does the yield curve predict economic activity? Dissecting the evidence for Germany and the United States," BIS Working Papers 49, Bank for International Settlements.
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    25. Kevin Clinton, 1995. "The term structure of interest rates as a leading indicator of economic activity: A technical note," Bank of Canada Review, Bank of Canada, vol. 1994(Winter), pages 23-40.
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    27. Jeffrey C. Fuhrer, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 111(4), pages 1183-1209.
    28. Lange, Ron, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    29. Ronald Lange, 2008. "A decomposition of the predictive content of the term structure for output growth in Canada," Applied Economics, Taylor & Francis Journals, vol. 40(12), pages 1537-1545.
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