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

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  • Ronald Lange

Abstract

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.

Suggested Citation

  • Ronald Lange, 2005. "Determinants of the long-term yield in Canada: an open economy VAR approach," Applied Economics, Taylor & Francis Journals, vol. 37(6), pages 681-693.
    • Handle: RePEc:taf:applec:v:37:y:2005:i:6:p:681-693
    DOI: 10.1080/0003684042000337389
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    References listed on IDEAS

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    Cited by:

    1. Todd Potts & David Yerger, 2010. "Variations Across Canadian Regions in the Sensitivity to U.S. Monetary Policy," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(4), pages 443-454, December.
    2. Wong, Edwin & Lucia, Kathlyn & Price, Stephanie & Startz, Richard, 2011. "The changing relation between the Canadian and U.S. yield curves," Journal of International Money and Finance, Elsevier, vol. 30(6), pages 965-981, October.
    3. Ronald H. Lange, 2013. "Monetary policy reactions and the exchange rate: a regime-switching structural VAR for Canada," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 612-632, September.
    4. Gunji, Hiroshi & Miura, Kazuki & Yuan, Yuan, 2009. "Bank competition and monetary policy," Japan and the World Economy, Elsevier, vol. 21(1), pages 105-115, January.
    5. Ronald Lange, 2008. "A decomposition of the predictive content of the term structure for output growth in Canada," Applied Economics, Taylor & Francis Journals, vol. 40(12), pages 1537-1545.
    6. Sonali Jain-Chandra & D. Filiz Unsal, 2014. "The effectiveness of monetary policy transmission under capital inflows: Evidence from Asia," Borsa Istanbul Review, Research and Business Development Department, Borsa Istanbul, vol. 14(2), pages 96-103, June.
    7. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    8. Lange, Ronald H., 2013. "The Canadian macroeconomy and the yield curve: A dynamic latent factor approach," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 261-274.
    9. Mansor H. IBRAHIM, 2007. "The Yen‐Dollar Exchange Rate And Malaysian Macroeconomic Dynamics," The Developing Economies, Institute of Developing Economies, vol. 45(3), pages 315-338, September.

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