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A time–frequency analysis of the Canadian macroeconomy and the yield curve

Author

Listed:
  • Mustapha Olalekan Ojo

    () (University of Minho)

  • Luís Aguiar-Conraria

    () (University of Minho)

  • Maria Joana Soares

    () (University of Minho)

Abstract

We use wavelet analysis to study the relationship between the yield curve and macroeconomic indicators in Canada. We rely on the Nelson–Siegel approach to model the zero-coupon yield curve and use the Kalman filter to estimate its time-varying factors: the level, the slope and the curvature. Apart from establishing a bidirectional yield–macro relation, the paper broadens the existing literature by exploring the link between the monetary policy and the yield curve. We reached several conclusions. First, the monetary policy variable, the bank rate, affects mainly short-run interest rates. Arguably, the main driver for economic activity is the long-run interest rate (instead of the short run), suggesting that monetary policy is mostly ineffective. Second, we concluded that concerning the inflation rate, the Bank of Canada is very proactive. Third, regarding the unemployment rate, we found that both the slope and the curvature are leading indicators for the long-run evolution of unemployment. Finally, our results suggest that the industrial production index leads the yield curve factors and not the other way.

Suggested Citation

  • 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.
  • Handle: RePEc:spr:empeco:v:58:y:2020:i:5:d:10.1007_s00181-018-1580-y
    DOI: 10.1007/s00181-018-1580-y
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Term structure; Yield curve; Macroeconomic variables; Wavelet power spectrum; Wavelet coherency; Wavelet phase difference;
    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
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other

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