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

See all articles by Bernd Hayo

Bernd Hayo

University of Marburg - School of Business & Economics

Matthias Neuenkirch

University of Trier - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 29, 2010

Abstract

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

Hayo, Bernd and Neuenkirch, Matthias, Canadian Interest Rate Setting: The Information Content of Canadian and U.S. Central Bank Communication (June 29, 2010). MAGKS Joint Discussion Paper Series in Economics No. 35-2009, Available at SSRN: https://ssrn.com/abstract=1462883 or http://dx.doi.org/10.2139/ssrn.1462883

Bernd Hayo (Contact Author)

University of Marburg - School of Business & Economics ( email )

Universitaetsstr. 24
Marburg, D-35032
Germany
++49(0)6421-28-23091 (Phone)
++49(0)6421-28-23193 (Fax)

Matthias Neuenkirch

University of Trier - Faculty of Economics ( email )

Universitätsring 15
Trier, 54296
Germany
+49 - (0)651 - 201 - 2629 (Phone)

HOME PAGE: http://www.uni-trier.de/index.php?id=50130

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

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