From Monetary Policy Instruments to Administered Interest Rates: The Transmission Mechanism in Canada

The authors investigate interest-rate aspects of the transmission mechanism of monetary policy instruments in Canada, focussing on the stability of the relationships between some key interest rates and the instruments of monetary policy. To determine what shifts may have occurred in recent years, they describe movements in rate differentials, apply cointegration tests and estimate error-correction models. Some changes in the short-run behaviour of money market yields, prime lending rates and mortgage rates between the 1980s and the 1990s are apparent. However, the basic links of the interest-rate channel of transmission—from policy instruments through short-term rates to short-term bond rates and administered rates—seem essentially stable.