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

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  • Toni Gravelle
  • Richhild Moessner

Abstract

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.

Suggested Citation

  • Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Staff Working Papers 01-5, Bank of Canada.
  • Handle: RePEc:bca:bocawp:01-5
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    References listed on IDEAS

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    More about this item

    Keywords

    Interest rates; Monetary policy implementation; Financial markets;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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