International Interest Rate Linkages and Monetary Policy: A Canadian Perspective

This paper examines the implications of increased international capital mobility and asset substitutability for domestic monetary policy in a small open economy such as Canada. Alternative definitions of international financial market integration are presented and tested in the context of two popular macro models. In the main, results suggest that interest rate relationships in Canada have not changed significantly in recent years and that the implementation and effectiveness of monetary policy have not been affected by the increased financial market integration that has taken place in overseas economies.