December 15, 2000
Interest rates
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Estimating the Fractional Order of Integration of Interest Rates Using a Wavelet OLS Estimator
The debate on the order of integration of interest rates has long focused on the I(1) versus I(0) distinction. In this paper, we use instead the wavelet OLS estimator of Jensen (1999) to estimate the fractional integration parameters of several interest rates for the United States and Canada from 1948 to 1999. -
December 13, 1999
Feedback Rules for Inflation Control: An Overview of Recent Literature
Feedback rules are rules aimed at guiding policy-makers as they face the problem of keeping inflation close to a desired path without causing variability elsewhere in the economy. These rules link short-term interest rates, controlled by the central bank, to the rate of inflation and/or its deviation from a target rate. The authors describe the most popular types of feedback rules and review some simulation results. -
The Expectations Hypothesis for the Longer End of the Term Structure: Some Evidence for Canada
This paper assesses the expectations theory for the longer end of the term structure of Canadian interest rates using three empirical approaches that have received attention in the literature: (i) cointegration tests of the long-run unbiasedness hypothesis; (ii) simulations of a theoretical long-term yield that is consistent with the expectations hypothesis, and (iii) ex post […] -
Estimating One-Factor Models of Short-Term Interest Rates
There currently exists in the literature several continuous-time one-factor models for short-term interest rates. This paper considers a wide range of these models that are nested into one general model. These models are approximated using both a discrete-time model and a model that accounts for aggregation effects over time, and are estimated by both the […] -
The Information Content of Interest Rate Futures Options
Options prices are being increasingly employed to extract market expectations and views about monetary policy. In this paper, eurodollar options are monitored to examine the evolution of market sentiment over the possible future values of eurodollar rates. Risk-neutral probability functions are employed to synopsize the information contained in the prices of euro/dollar futures options. Several […] -
Uncovering Inflation Expectations and Risk Premiums From Internationally Integrated Financial Markets
Theory and empirical evidence suggest that the term structure of interest rates reflects risk premiums as well as market expectations about future inflation and real interest rates. We propose an approach to extracting such premiums and expectations by exploiting both the comovements among interest rates across the yield curve and between two countries, Canada and […] -
A Non-Paradoxical Interpretation of the Gibson Paradox
In this study, we show how, to yield the real cost of borrowing, the price level can be combined with the nominal interest rate in a monetary regime where the level of prices is trend stationary. We show that the price level then conveys intertemporal information in a way similar to nominal interest rates. We […] -
May 13, 1998
Canada-U.S. long-term interest differentials in the 1990s
Long-term Canada-U.S. interest spreads have changed remarkably during the 1990s. The unusually wide spreads of the first half of the decade have given way to an unprecedented run of negative yield differentials. In this article, the author examines the conceptual aspects of yields on international assets and their application to the Canada-U.S. situation. Prior to 1995, investors were unsure that, over the long run, inflation would meet the targets set by the government and the Bank. Policy credibility was undermined by large budget deficits and political uncertainty. In the second half of the decade, confidence was re-established as the fiscal positions of governments improved, long-run price stability became established, and political concerns about Quebec lessened. As long as these fundamentals hold, long-term rates should remain relatively low, even when short-term rates rise. -
Predicting Canadian Recessions Using Financial Variables: A Probit Approach
This paper examines the ability of a number of financial variables to predict Canadian recessions. Regarding methodology, we follow closely the technique employed by Estrella and Mishkin (1998), who use a probit model to predict U.S. recessions up to eight quarters in advance. Our main finding is that the spread between the yield on Canadian […]