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Canadian Interest Rate Setting: The Information Content of Canadian and U.S. Central Bank Communication

  • Bernd Hayo

    (Faculty of Business Administration and Economics, Philipps-University Marburg, D-35032 Marburg, Germany)

  • Matthias Neuenkirch


    (Faculty of Business Administration and Economics, Philipps-University Marburg, D-35032 Marburg, Germany)

We explain Canadian target rate decisions using macroeconomic variables as well as Bank of Canada and Federal Reserve communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to explain and predict 60 target rate decisions between 1998 and 2006. We find that communications, especially speeches and testimony by Canadian Governing Council members, provide a significant and robust explanation of Canadian target rate decisions. However, prior to the introduction of fixed announcement dates, Canadian communications contained more information on upcoming policy moves. Finally, communications by the U.S. Federal Reserve Bank—which are much more frequent—outperform our Canadian communication indicators in explaining Canadian interest rate decisions.

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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 78 (2011)
Issue (Month): 1 (July)
Pages: 131-148

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Handle: RePEc:sej:ancoec:v:78:1:y:2011:p:131-148
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