Canadian Interest Rate Setting: The Information Content of Canadian and U.S. Central Bank Communication
MAGKS Joint Discussion Paper Series in Economics No. 35-2009
25 Pages Posted: 27 Aug 2009 Last revised: 29 Jun 2010
Date Written: June 29, 2010
We explain Canadian target rate decisions using macroeconomic variables as well as Bank of Canada (BOC) and Federal Reserve (Fed) communication indicators. Econometrically, we employ an ordered probit model of a Taylor rule to explain and predict 60 target rate decisions between 1998 and 2006. We find that communications, and most especially speeches and testimony by Canadian Governing Council members, provide a significant and robust explanation of Canadian target rate decisions. However, prior to the introduction of fixed announcement dates, Canadian communications contained more information on upcoming policy moves. Finally, communications by the U.S. Federal Reserve Bank—which are much more frequent—outperform our Canadian communication indicators in explaining Canadian interest rate decisions.
Keywords: Bank of Canada, Central Bank Communication, Federal Reserve Bank, Interest Rate Decision, Monetary Policy, Ordered Probit Model, Taylor Rule
JEL Classification: E43, E52, E58
Suggested Citation: Suggested Citation