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

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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.
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Document Type: Research Article

Affiliations: Economics Department, Laurentian University, Sudbury, Ontario, Canada, P3E 2C6, Email: rlange@sympatica.ca

Publication date: 2005-04-10

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