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Determinants of the long-term yield in Canada: an open economy VAR approach

  • Ronald Lange
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    This study analyses the economic determinants of short- and long-term interest rates in Canada using a structural vector autoregressive (VAR) model. The VAR takes into consideration that Canadian financial markets are small and open relative to those in the USA and that Canada is a relatively large exporter of commodities. In part, the empirical results for Canada are similar to those for the USA. Aggregate demand shocks have relatively large and persistent effects on long-term yields, while aggregate supply shocks do not have significant effects. However, monetary policy shocks in Canada are found to have larger and more persistent effects on long-term yields than those found for the USA. The most striking result is that movements in US monetary policy have relatively large, significant and persistent effects on Canadian long-term bond yields. Furthermore, US monetary policy disturbances can account for the overall trend in long-term yields in Canada.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0003684042000337389
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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 37 (2005)
    Issue (Month): 6 ()
    Pages: 681-693

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    Handle: RePEc:taf:applec:v:37:y:2005:i:6:p:681-693
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    1. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    2. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    3. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," NBER Working Papers 1885, National Bureau of Economic Research, Inc.
    4. Christopher A. Sims & Tao Zha, 1994. "Error Bands for Impulse Responses," Cowles Foundation Discussion Papers 1085, Cowles Foundation for Research in Economics, Yale University.
    5. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
    7. Shiller, Robert & Campbell, John, 1991. "Yield Spreads and Interest Rate Movements: A Bird's Eye View," Scholarly Articles 3221490, Harvard University Department of Economics.
    8. Charles L. Evans & David Marshall, 2001. "Economic determinants of the nominal treasury yield curve," Working Paper Series WP-01-16, Federal Reserve Bank of Chicago.
    9. 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.
    10. 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 169-93, February.
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