L'endettement du Canada et ses effets sur les taux d'intérêt réels de long terme
This paper examines the effects that Canada's indebtedness has on Canadian real long-term interest rates, using the vector error-correction model (VECM). Our results show that there is a strongly cointegrated relationship between real interest rates in Canada, U.S. real interest rates, and Canadian public and external debt ratios. Within that relationship, however, the problem of collinearity between the two debt variables makes it difficult to identify the precise effects on Canadian real interest rates. To circumvent this problem, we perform a number of simulations to examine the effects of indebtedness on real interest rates by applying a shock to the public sector debt ratio. In these simulations, we control, first, for the effect of public sector debt on external debt and, second, for the long-term effect of each of these debt ratios on real interest rates. According to our base-case results, each percentage point increase in the public sector debt-to-GDP ratio causes real long-term interest rates in Canada to rise by 3.1 basis points. In another model, where U.S. interest rates are adjusted for the risk function, an increase in indebtedness raises Canadian interest rates by 5.0 basis points for each percentage point of the debt ratio. These results suggest that the increase of the public sector debt ratio from 1990 to 1994 accounts for an increase of 85 to 135 basis points in real interest rates, i.e., a sizeable portion of the 200-point increase in the differential between Canadian and U.S. real interest rates.