COVID-19 Effects on the Canadian Term Structure of Interest Rates

27 Pages Posted: 13 Jan 2021 Last revised: 13 Jul 2021

See all articles by Federico Severino

Federico Severino

Université Laval; Université Laval - Faculty of Business Administration

Marzia A. Cremona

Université Laval - CHU de Québec Research Center; Université Laval - Faculty of Business Administration

Éric Dadié

Université Laval - Faculty of Business Administration

Date Written: July 13, 2021

Abstract

In Canada, COVID-19 pandemic triggered exceptional monetary policy interventions by the central bank, which in March 2020 made multiple unscheduled cuts to its target rate. The aim of this paper is to assess the extent to which Bank of Canada interventions affected the determinants of the yield curve. By applying Functional Principal Component Analysis to the term structure of interest rates we find that, during the pandemic, the long-run dependence of level and slope components of the yield curve is unchanged with respect to previous months, although the shape of the mean yield curve completely changed after target rate cuts. Bank of Canada was effective in lowering the whole yield curve and correcting the inverted hump of previous months, but it was not able to reduce the exposure to already existing long-run risks.

Keywords: Canadian Yield Curve, COVID-19, Monetary Policy, Functional Principal Components Analysis, Smoothing

JEL Classification: E43, E58, G01

Suggested Citation

Severino, Federico and Cremona, Marzia A. and Cremona, Marzia A. and Dadié, Éric, COVID-19 Effects on the Canadian Term Structure of Interest Rates (July 13, 2021). Available at SSRN: https://ssrn.com/abstract=3762628 or http://dx.doi.org/10.2139/ssrn.3762628

Federico Severino (Contact Author)

Université Laval ( email )

Pavillon Palasis-Prince
2325 rue de la Terrasse
Québec, Quebec G1V 0A6
Canada

HOME PAGE: http://https://federicoseverino.org

Université Laval - Faculty of Business Administration ( email )

Canada

HOME PAGE: http://https://federicoseverino.org

Marzia A. Cremona

Université Laval - CHU de Québec Research Center ( email )

2214 Pavillon J-A. DeSeve
Quebec, Quebec G1K 7P4
Canada

Université Laval - Faculty of Business Administration ( email )

2325, rue de la Terrasse
Pavillon Palasis-Prince
Québec, Québec G1V 0A6
Canada

Éric Dadié

Université Laval - Faculty of Business Administration ( email )

Canada

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