E43 - Interest Rates: Determination, Term Structure, and Effects
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Noisy Monetary Policy
We introduce limited information in monetary policy. Agents receive signals from the central bank revealing new information (“news") about the future evolution of the policy rate before changes in the rate actually take place. However, the signal is disturbed by noise. -
Uncovered Return Parity: Equity Returns and Currency Returns
We propose an uncovered expected returns parity (URP) condition for the bilateral spot exchange rate. URP implies that unilateral exchange rate equations are misspecified and that equity returns also affect exchange rates. Fama regressions provide evidence that URP is statistically preferred to uncovered interest rate parity (UIP) for nominal bilateral exchange rates between the US dollar and six countries (Australia, Canada, Japan, Norway, Switzerland and the UK) at the monthly frequency. -
Could a Higher Inflation Target Enhance Macroeconomic Stability?
Recent international experience with the effective lower bound on nominal interest rates has rekindled interest in the benefits of inflation targets above 2 per cent. We evaluate whether an increase in the inflation target to 3 or 4 per cent could improve macroeconomic stability in the Canadian economy. -
What Drives Interbank Loans? Evidence from Canada
We identify the drivers of unsecured and collateralized loan volumes, rates and haircuts in Canada using the Bayesian model averaging approach to deal with model uncertainty. Our results suggest that the key friction driving behaviour in this market is the collateral reallocation cost faced by borrowers. -
Which Model to Forecast the Target Rate?
Specifications of the Federal Reserve target rate that have more realistic features mitigate in-sample over-fitting and are favored in the data. -
The Impacts of Monetary Policy Statements
In this note, we find that market participants react to an unexpected change in the tone of Canadian monetary policy statements. When the market perceives that the Bank of Canada plans to tighten (or alternatively, loosen) the monetary policy earlier than previously expected, the Canadian dollar appreciates (or depreciates) and long-term Government of Canada bond yields increase (or decrease). The tone of a statement is particularly relevant to the market when the policy rate has been unchanged for some time. -
November 16, 2017
An Update on the Neutral Rate of Interest
The neutral rate serves as a benchmark for measuring monetary stimulus and provides a medium- to long-run anchor for the real policy rate. Global neutral rate estimates have been falling over the past few decades. Factors such as population aging, high corporate savings, and low trend productivity growth are likely to continue supporting a low global neutral rate. These global factors as well as domestic factors are exerting downward pres-sure on the Canadian real neutral rate, which is estimated to be between 0.5 to 1.5 per cent. This low neutral rate has important implications for monetary policy and financial stability. -
Changes in Monetary Regimes and the Identification of Monetary Policy Shocks: Narrative Evidence from Canada
We use narrative evidence along with a novel database of real-time data and forecasts from the Bank of Canada's staff economic projections from 1974 to 2015 to construct a new measure of monetary policy shocks and estimate the effects of monetary policy in Canada. -
Optimal Estimation of Multi-Country Gaussian Dynamic Term Structure Models Using Linear Regressions
This paper proposes a novel asymptotic least-squares estimator of multi-country Gaussian dynamic term structure models that is easy to compute and asymptotically efficient, even when the number of countries is relatively large—a situation in which other recently proposed approaches lose their tractability.