August 10, 1996
Interest rates
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Decomposing U.S. Nominal Interest Rates into Expected Inflation and Ex Ante Real Interest Rates Using Structural VAR Methodology
In this paper, the author uses structural vector autoregression methodology to decompose U.S. nominal interest rates into an expected inflation component and an ex ante real interest rate component. He identifies inflation expectations and ex ante real interest rate shocks by assuming that nominal interest rates and inflation expectations move one-for-one in the long-run—they are cointegrated (1,1)—and that the real interest rate is stationary. -
Deriving Agents' Inflation Forecasts from the Term Structure of Interest Rates
In this paper, the author uses the term structure of nominal interest rates to construct estimates of agents' expectations of inflation over several medium-term forecast horizons. The Expectations Hypothesis is imposed together with the assumption that expected future real interest rates are given by current real rates. Under these maintained assumptions, it is possible to […] -
December 9, 1994
The term structure of interest rates as a leading indicator of economic activity: A technical note
The spread between long-term and short-term interest rates has proven to be an excellent predictor of changes of economic activity in Canada. As a general rule, when long-term interest rates have been much above short-term rates, strong increases in output have followed within about a year; however, whenever the yield curve has been inverted for any extended period of time, a recession has followed. Similar findings exist for other countries, including the United States. But although Canadian and U.S. interest rates generally move quite closely together, the Canadian yield curve has been distinctly better at predicting future Canadian output. The explanation given for this result is that the term spread has reflected both current monetary conditions, which affect short-term interest rates, and expected real returns on investment and expectations of inflation, which are the main determinants of long-term rates. This article is mainly a summary of econometric work done at the Bank. It also touches on some of the extensive recent literature in this area. -
The Term Structure and Real Activity in Canada
This paper examines the predictive content of the term structure of interest rates for economic activity in Canada. Recent papers for the United States and other countries find that the slope of the term structure is a very good predictor of output growth. -
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 […] -
The Structure of the Small Annual Model
This volume contains a detailed description of the structure and sectoral properties of the Bank of Canada's Small Annual Model, SAM. The SAM model, constructed in the Research Department of the Bank, is designed for medium- to long-term simulation. It is small by econometric model standards; the version described in this report has 25 stochastic […] -
The Inflation-adjusted Rate of Return on Corporate Debt and Equity: 1966-1980
This report has two main objectives: First, to determine whether the real tax rate on investment income has proven sensitive to inflation; second, to determine the extent to which real returns to debt and equity, based on published data, differ from those based on inflation-adjusted data. The scope of the inflationary distortion in corporate income […]
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