Does Financial Structure Matter for the Information Content of Financial Indicators? Staff Working Paper 2005-33 Ramdane Djoudad, Jack Selody, Carolyn A. Wilkins Of particular concern to monetary policy-makers is the considerable unreliability of financial variables for predicting GDP growth and inflation. Content Type(s): Staff research, Staff working papers Topic(s): Business fluctuations and cycles, Credit and credit aggregates, Inflation and prices, Interest rates, Monetary aggregates JEL Code(s): E, E3, E31, E32
An Empirical Analysis of the Canadian Term Structure of Zero-Coupon Interest Rates Staff Working Paper 2004-48 David Bolder, Adam Metzler, Grahame Johnson Zero-coupon interest rates are the fundamental building block of fixed-income mathematics, and as such have an extensive number of applications in both finance and economics. Content Type(s): Staff research, Staff working papers Topic(s): Econometric and statistical methods, Financial markets, Interest rates JEL Code(s): C, C0, C6, E, E4, G, G1
November 23, 2004 Real Return Bonds: Monetary Policy Credibility and Short-Term Inflation Forecasting Bank of Canada Review - Autumn 2004 Christopher Reid, Frédéric Dion, Ian Christensen The break-even inflation rate (BEIR) is calculated by comparing the yields on conventional and Real Return Bonds. Defined as the average rate of inflation that equates the expected returns on these two bonds, the BEIR has the potential to contain useful information about long-run inflation expectations. Yet the BEIR has been higher, on average, and more variable than survey measures of inflation expectations, which may be explained by the effects of premiums and distortions embedded in the BEIR. Because of the difficulty in accounting for these distortions, the BEIR should not be given a large weight as a measure of long-run inflation expectations at this time. However, as the Real Return Bond market continues to develop, the BEIR should become a more useful indicator of inflation expectations. At present, it demonstrates no clear advantage over survey measures and even past inflation rates in forecasting near-term inflation. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Inflation and prices, Interest rates, Market structure and pricing
Real Return Bonds, Inflation Expectations, and the Break-Even Inflation Rate Staff Working Paper 2004-43 Ian Christensen, Christopher Reid, Frédéric Dion According to the Fisher hypothesis, the gap between Canadian nominal and Real Return Bond yields (or break-even inflation rate) should be a good measure of inflation expectations. Content Type(s): Staff research, Staff working papers Topic(s): Inflation and prices, Interest rates, Market structure and pricing JEL Code(s): E, E3, E31, E4, E43
August 24, 2004 The Efficiency of Canadian Capital Markets: Some Bank of Canada Research Bank of Canada Review - Summer 2004 Scott Hendry, Michael R. King Capital markets and their related financial instruments make an important contribution to the welfare of Canadians. The Bank of Canada is interested in the efficient functioning of capital markets through each of its responsibilities for monetary policy, the financial system, and funds management. Hendry and King highlight the key findings of Bank research published over the past year that addresses capital market efficiency and summarize lessons that have been learned. The research conducted thus far suggests that Canadian capital markets are efficient for a capital market of Canada's size but are less diverse than the U.S. capital markets, indicating that there is room for improvement in certain areas. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Financial markets, Financial services, Interest rates, Market structure and pricing
Convergence of Government Bond Yields in the Euro Zone: The Role of Policy Harmonization Staff Working Paper 2004-23 Denise Côté, Christopher Graham Since the early 1980s, long-term government bond yields in the euro zone have declined, in line with those in other industrialized countries. Content Type(s): Staff research, Staff working papers Topic(s): Interest rates, International topics JEL Code(s): C, C2, C23, E, E4, E43, E44, F, F3, F36
Estimating Policy-Neutral Interest Rates for Canada Using a Dynamic Stochastic General-Equilibrium Framework Staff Working Paper 2004-9 Jean-Paul Lam, Greg Tkacz In an era when the primary policy instrument is the level of the short-term interest rate, a comparison of that rate with some equilibrium rate can be a useful guide for policy and a convenient method to measure the stance of monetary policy. Content Type(s): Staff research, Staff working papers Topic(s): Interest rates JEL Code(s): C, C3, C32, E, E3, E37
November 23, 2003 An Evaluation of Fixed Announcement Dates Bank of Canada Review - Autumn 2003 Nicolas Parent, Phoebe Munro, Ron Parker When it launched a new system for regularly announcing its decisions regarding the overnight rate of interest in December 2000, the Bank of Canada had a number of key objectives in mind. These included reduced uncertainty in financial markets, greater focus on the Canadian rather than the U.S. economic environment, more emphasis on the medium-term perspective of monetary policy, and increased transparency regarding the Bank's interest rate decisions. Evidence to date suggests that all four objectives have been met to a substantial degree. Fixed announcement dates have provided regular opportunities for the Bank to communicate its views on the state of the Canadian economy to the public. This has helped to improve understanding of the broad direction of monetary policy and of the rationale behind the Bank's policy decisions although the decisions themselves are not always fully anticipated. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Credibility, Financial markets, Interest rates, Monetary policy and uncertainty, Monetary policy implementation
Measuring Interest Rate Expectations in Canada Staff Working Paper 2003-26 Grahame Johnson Financial market expectations regarding future policy actions by the Bank of Canada are an important input into the Bank's decision-making process, and they can be measured using a variety of sources. The author develops a simple expectations-based model to focus on measuring interest rate expectations that are implied by the current level of money market yields. Content Type(s): Staff research, Staff working papers Topic(s): Financial markets, Interest rates JEL Code(s): G, G1
August 22, 2003 Measuring Interest Rate Expectations in Canada Bank of Canada Review - Summer 2003 Grahame Johnson Financial market expectations regarding future changes in the target for the overnight rate of interest are an important source of information for the Bank of Canada. Financial markets are the mechanism through which the policy rate affects other financial variables, such as longer-term interest rates, the exchange rate, and other asset prices. An accurate measure of their expectations can therefore help policy-makers assess the potential impact of contemplated changes. Johnson focuses on the expectations hypothesis, which measures expectations of future levels of the target overnight rate as implied by current money market yields. Although expectations can be derived from the current yield on any short-term fixed-income asset, some assets have proven to be more accurate predictors than others. The implementation of a policy of fixed-announcements dates has coincided with the increased predictive power of these short-term assets. As a result of this improvement, a relatively simple model of the yield curve can now provide an accurate measure of financial market expectations. Content Type(s): Publications, Bank of Canada Review articles Topic(s): Exchange rates, Financial markets, Interest rates