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Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency

  • Toni Gravelle
  • Richhild Moessner

In this study we statistically quantify the reactions of Canadian and U.S. interest rates to macroeconomic announcements released in Canada and in the United States. We find that Canadian interest rates react very little to Canadian macroeconomic news and are significantly affected by U.S. macroeconomic news, which indicates that international influences on the Canadian fixed-income markets are important. Moreover, we find little evidence that Canadian interest rates have become more sensitive to Canadian macroeconomic announcements over time. This suggests that Canadian market participants have gained little understanding of which macroeconomic variables condition the Bank's monetary policy reaction function and that the Bank of Canada's efforts, since the early 1990s, to make its conduct of monetary policy more transparent to the public have not been fruitful. We hypothesize that the lack of fixed monetary policy announcement dates in Canada prior to December 2000, and the Bank's efforts to, on occasion, smooth destabilizing fluctuations in foreign exchange rates, have contributed to the inability of Canadian market participants to better understand the monetary policy reaction function.

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Paper provided by Bank of Canada in its series Working Papers with number 01-5.

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Length: 43 pages
Date of creation: 2001
Date of revision:
Handle: RePEc:bca:bocawp:01-5
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  1. Clinton, Kevin, 2001. "On Commodity-Sensitive Currencies and Inflation Targeting," Working Papers 01-3, Bank of Canada.
  2. Michael J. Fleming & Eli M. Remolona, 1999. "The term structure of announcement effects," Staff Reports 76, Federal Reserve Bank of New York.
  3. W.H. Buiter, 1999. "Alice in Euroland," CEP Discussion Papers dp0423, Centre for Economic Performance, LSE.
  4. William Poole & Robert H. Rasche, 2000. "Perfecting the market's knowledge of monetary policy," Working Papers 2000-010, Federal Reserve Bank of St. Louis.
  5. Michael J. Fleming & Eli M. Remolona, 1997. "What moves the bond market?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 31-50.
  6. Murray, John & Mark Zelmer & Zahir Antia, 2000. "International Financial Crises and Flexible Exchange Rates: Some Policy Lessons from Canada," Technical Reports 88, Bank of Canada.
  7. Muller, P. & M. Zelmer, 1999. "Greater Transparency in Monetary Policy: Impact on Financial Markets," Technical Reports 86, Bank of Canada.
  8. Tarkka, Juha & Mayes, David, 1999. "The Value of Publishing Official Central Bank Forecasts," Research Discussion Papers 22/1999, Bank of Finland.
  9. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
  10. Andrew G Haldane & Vicky Read, 2000. "Monetary policy surprises and the yield curve," Bank of England working papers 106, Bank of England.
  11. Andrew Clare & Roger Courtenay, 2001. "Assessing the impact of macroeconomic news announcements on securities prices under different monetary policy regimes," Bank of England working papers 125, Bank of England.
  12. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
  13. Serge Boisvert & Nancy Harvey, 1998. "The declining supply of treasury bills and the Canadian money market," Bank of Canada Review, Bank of Canada, vol. 1998(Summer), pages 53-69.
  14. Daniel L. Thornton, 1996. "Does the Fed's new policy of immediate disclosure affect the market?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 77-88.
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