International Interest Rate Differentials: The Interaction with Fiscal and Monetary Variables, and the Business Cycle
CREFE Working Paper 56
Posted: 9 Mar 1998
Date Written: 1998-01
Adapting Den Haan's (1996) methodology based on VARs, this paper documents stylized facts about various deviations from international no arbitrage conditions between Canada and the United States. The calculated statistics provide important information about the dynamics of the economic variables that is lost when the focus is solely on unconditional correlation coefficients. In particular, we find that a higher public debt path and slower economic growth in Canada are associated with higher real interest rates in that country relative to that of the US. These results may suggest that international interest rate differentials reflect, at least in part, a risk premium.
JEL Classification: E44, F3, G15
Suggested Citation: Suggested Citation