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

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  • 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
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    References listed on IDEAS

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    Cited by:

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    2. 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.
    3. Mustapha Olalekan Ojo & Luís Aguiar-Conraria & Maria Joana Soares, 2017. "A time-frequency analysis of the Canadian macroeconomy and the yield curve," NIPE Working Papers 12/2017, NIPE - Universidade do Minho.
    4. 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.
    5. 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.
    6. 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.
    7. 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.
    8. 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.
    9. 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.
    10. 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.
    11. 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.
    12. 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.
    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.

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    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

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