IDEAS home Printed from https://ideas.repec.org/a/eee/reveco/v27y2013icp261-274.html
   My bibliography  Save this article

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

Author

Listed:
  • Lange, Ronald H.

Abstract

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.

Suggested Citation

  • Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    • Handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:261-274
    DOI: 10.1016/j.iref.2012.10.003
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1059056012001207
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.iref.2012.10.003?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. 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.
    2. Tao Wu, 2003. "Stylized facts on nominal term structure and business cycles: an empirical VAR study," Applied Economics, Taylor & Francis Journals, vol. 35(8), pages 901-906.
    3. Arturo Estrella & Frederic S. Mishkin, 1998. "Predicting U.S. Recessions: Financial Variables As Leading Indicators," The Review of Economics and Statistics, MIT Press, vol. 80(1), pages 45-61, February.
    4. René Garcia & Richard Luger, 2007. "The Canadian macroeconomy and the yield curve: an equilibrium‐based approach," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 561-583, May.
    5. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
    6. Jeffrey C. Fuhrer, 1996. "Monetary Policy Shifts and Long-Term Interest Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 111(4), pages 1183-1209.
    7. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    8. Walid Hejazi & Huiwen Lai & Xian Yang, 2000. "The expectations hypothesis, term premia, and the Canadian term structure of interest rates," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 133-148, February.
    9. David Bolder & Scott Gusba, 2002. "Exponentials, Polynomials, and Fourier Series: More Yield Curve Modelling at the Bank of Canada," Staff Working Papers 02-29, Bank of Canada.
    10. Lange, Ronald H., 2010. "Regime-switching monetary policy in Canada," Journal of Macroeconomics, Elsevier, vol. 32(3), pages 782-796, September.
    11. Jamie Armour & Walter Engert & Ben Fung, 1996. "Overnight Rate Innovations as a measure of monetary Policy Shocks in Vector Autoregressions," Staff Working Papers 96-4, Bank of Canada.
    12. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    13. David Bolder & Grahame Johnson & Adam Metzler, 2004. "An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates," Staff Working Papers 04-48, Bank of Canada.
    14. Diebold, Francis X. & Li, Canlin, 2006. "Forecasting the term structure of government bond yields," Journal of Econometrics, Elsevier, vol. 130(2), pages 337-364, February.
    15. Evans, Charles L. & Marshall, David A., 1998. "Monetary policy and the term structure of nominal interest rates: Evidence and theory," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 53-111, December.
    16. Ronald Lange, 2005. "Determinants of the long-term yield in Canada: an open economy VAR approach," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 681-693.
    17. Campbell R. Harvey, 1997. "The Relation between the Term Structure of Interest Rates and Canadian Economic Growth," Canadian Journal of Economics, Canadian Economics Association, vol. 30(1), pages 169-193, February.
    18. Svensson, L.E.O., 1994. "Estimating and Interpreting Foreward Interest Rates: Sweden 1992-1994," Papers 579, Stockholm - International Economic Studies.
    19. Estrella, Arturo & Hardouvelis, Gikas A, 1991. "The Term Structure as a Predictor of Real Economic Activity," Journal of Finance, American Finance Association, vol. 46(2), pages 555-576, June.
    20. Barry Cozier & Greg Tkacz, "undated". "The Term Structure and Real Activity in Canada," Staff Working Papers 94-3, Bank of Canada.
    21. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, vol. 60(4), pages 473-489, October.
    22. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    23. Kozicki, Sharon & Tinsley, P. A., 2001. "Shifting endpoints in the term structure of interest rates," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 613-652, June.
    24. Ron Lange, 1999. "The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada," Staff Working Papers 99-20, Bank of Canada.
    25. 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.
    26. 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.
    27. Venetis, Ioannis A. & Paya, Ivan & Peel, David A., 2003. "Re-examination of the predictability of economic activity using the yield spread: a nonlinear approach," International Review of Economics & Finance, Elsevier, vol. 12(2), pages 187-206.
    28. Kulish, Mariano & Rees, Daniel, 2011. "The yield curve in a small open economy," Journal of International Economics, Elsevier, vol. 85(2), pages 268-279.
    29. Smets, Frank & Tsatsaronis, Kostas, 1997. "Why Does the Yield Curve Predict Economic Activity? Dissecting the Evidence for Germany and the United States," CEPR Discussion Papers 1758, C.E.P.R. Discussion Papers.
    30. Stephen S. Poloz & David Rose & Robert Tetlow, 1994. "The Bank of Canada's new Quarterly Projection Model (QPM): An introduction," Bank of Canada Review, Bank of Canada, vol. 1994(Autumn), pages 23-38.
    31. Christis Hassapis, 2003. "Financial variables and real activity in Canada," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 36(2), pages 421-442, May.
    32. Christis Hassapis, 2003. "Financial variables and real activity in Canada," Canadian Journal of Economics, Canadian Economics Association, vol. 36(2), pages 421-442, May.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sowmya, Subramaniam & Prasanna, Krishna & Bhaduri, Saumitra, 2016. "Linkages in the term structure of interest rates across sovereign bond markets," Emerging Markets Review, Elsevier, vol. 27(C), pages 118-139.
    2. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    3. Laurini, Márcio P. & Caldeira, João F., 2016. "A macro-finance term structure model with multivariate stochastic volatility," International Review of Economics & Finance, Elsevier, vol. 44(C), pages 68-90.
    4. Saar, Dan & Yagil, Yossi, 2015. "Forecasting sectorial profitability and credit spreads using bond yields," International Review of Economics & Finance, Elsevier, vol. 38(C), pages 29-43.
    5. Fernandez-Perez, Adrian & Fernández-Rodríguez, Fernando & Sosvilla-Rivero, Simón, 2014. "The term structure of interest rates as predictor of stock returns: Evidence for the IBEX 35 during a bear market," International Review of Economics & Finance, Elsevier, vol. 31(C), pages 21-33.
    6. Lange, Ronald H., 2017. "The expected real yield and inflation components of the nominal yield curve," The North American Journal of Economics and Finance, Elsevier, vol. 39(C), pages 1-18.
    7. Bouwman, Kees & Buis, Boyd & Pieterse-Bloem, Mary & Tham, Wing Wah, 2015. "A practical approach to constructing price-based funding liquidity factors," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 90-97.
    8. Mustapha Olalekan Ojo & Luís Aguiar-Conraria & Maria Joana Soares, 2020. "A time–frequency analysis of the Canadian macroeconomy and the yield curve," Empirical Economics, Springer, vol. 58(5), pages 2333-2351, May.
    9. Sowmya, Subramaniam & Prasanna, Krishna, 2018. "Yield curve interactions with the macroeconomic factors during global financial crisis among Asian markets," International Review of Economics & Finance, Elsevier, vol. 54(C), pages 178-192.
    10. Julián Andrada-Félix & Adrian Fernandez-Perez & Fernando Fernández-Rodríguez, 2015. "Fixed income strategies based on the prediction of parameters in the NS model for the Spanish public debt market," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 6(2), pages 207-245, June.
    11. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.
    12. Ronald Henry Lange, 2017. "Macroeconomic Switching Regimes and Monetary Policy in Canada," Applied Economics and Finance, Redfame publishing, vol. 4(4), pages 17-31, July.
    13. Lange, Ronald H., 2015. "International long-term yields and monetary policy in a small open economy: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 292-310.
    14. Polat, Onur & Ozkan, Ibrahim, 2019. "Transmission mechanisms of financial stress into economic activity in Turkey," Journal of Policy Modeling, Elsevier, vol. 41(2), pages 395-415.
    15. Krishna Prasanna & Subramaniam Sowmya, 2017. "Yield curve in India and its interactions with the US bond market," International Economics and Economic Policy, Springer, vol. 14(2), pages 353-375, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    2. Lange, Ronald Henry, 2018. "The term structure of liquidity premia and the macroeconomy in Canada: A dynamic latent-factor approach," International Review of Economics & Finance, Elsevier, vol. 57(C), pages 164-182.
    3. Lange, Ronald H., 2015. "International long-term yields and monetary policy in a small open economy: The case of Canada," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 292-310.
    4. Ronald Lange, 2005. "Determinants of the long-term yield in Canada: an open economy VAR approach," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 681-693.
    5. 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.
    6. Luciano Vereda & Hélio Lopes & Jessica Kubrusly & Adrian Pizzinga & Taofik Mohammed Ibrahim, 2014. "Yield Curve Forecasts and the Predictive Power of Macro Variables in a VAR Framework," Journal of Reviews on Global Economics, Lifescience Global, vol. 3, pages 377-393.
    7. Abdymomunov, Azamat, 2013. "Predicting output using the entire yield curve," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 333-344.
    8. Sanjay Singh & Neeraj Hatekar, 2018. "Macroeconomic shocks and evolution of term structure of interest rate: A dynamic latent factor approach," Indian Economic Review, Springer, vol. 53(1), pages 245-262, December.
    9. Mustapha Olalekan Ojo & Luís Aguiar-Conraria & Maria Joana Soares, 2020. "A time–frequency analysis of the Canadian macroeconomy and the yield curve," Empirical Economics, Springer, vol. 58(5), pages 2333-2351, May.
    10. Lange, Ronald Henry, 2018. "The predictive content of the term premium for GDP growth in Canada: Evidence from linear, Markov-switching and probit estimations," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 80-91.
    11. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    12. S. Boragan Aruoba & Francis X. Diebold & Glenn D. Rudebusch, 2003. "The macroeconomy and the yield curve: a nonstructural analysis," Working Paper Series 2003-18, Federal Reserve Bank of San Francisco.
    13. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 309-338.
    14. René Garcia & Richard Luger, 2007. "The Canadian macroeconomy and the yield curve: an equilibrium‐based approach," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 40(2), pages 561-583, May.
    15. Richard K. Crump & Stefano Eusepi & Emanuel Moench, 2016. "The term structure of expectations and bond yields," Staff Reports 775, Federal Reserve Bank of New York.
    16. Zhu, Xiaoneng & Rahman, Shahidur, 2015. "A regime-switching Nelson–Siegel term structure model of the macroeconomy," Journal of Macroeconomics, Elsevier, vol. 44(C), pages 1-17.
    17. Djuranovik, Leslie, 2014. "The Indonesian macroeconomy and the yield curve: A dynamic latent factor approach," Journal of Asian Economics, Elsevier, vol. 34(C), pages 1-15.
    18. Wu, Tao, 2006. "Macro Factors and the Affine Term Structure of Interest Rates," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1847-1875, October.
    19. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    20. Guidolin, Massimo & Thornton, Daniel L., 2018. "Predictions of short-term rates and the expectations hypothesis," International Journal of Forecasting, Elsevier, vol. 34(4), pages 636-664.

    More about this item

    Keywords

    Yield curve; Interest rates; Factor model; State-space model;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reveco:v:27:y:2013:i:c:p:261-274. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620165 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.