A time–frequency analysis of the Canadian macroeconomy and the yield curve

Mustapha Olalekan Ojo (), Luís Aguiar-Conraria () and Maria Joana Soares ()
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Mustapha Olalekan Ojo: University of Minho
Maria Joana Soares: University of Minho

Empirical Economics, 2020, vol. 58, issue 5, No 12, 2333-2351

Abstract: Abstract We use wavelet analysis to study the relationship between the yield curve and macroeconomic indicators in Canada. We rely on the Nelson–Siegel approach to model the zero-coupon yield curve and use the Kalman filter to estimate its time-varying factors: the level, the slope and the curvature. Apart from establishing a bidirectional yield–macro relation, the paper broadens the existing literature by exploring the link between the monetary policy and the yield curve. We reached several conclusions. First, the monetary policy variable, the bank rate, affects mainly short-run interest rates. Arguably, the main driver for economic activity is the long-run interest rate (instead of the short run), suggesting that monetary policy is mostly ineffective. Second, we concluded that concerning the inflation rate, the Bank of Canada is very proactive. Third, regarding the unemployment rate, we found that both the slope and the curvature are leading indicators for the long-run evolution of unemployment. Finally, our results suggest that the industrial production index leads the yield curve factors and not the other way.

Keywords: Term structure; Yield curve; Macroeconomic variables; Wavelet power spectrum; Wavelet coherency; Wavelet phase difference (search for similar items in EconPapers)
JEL-codes: C32 C49 E43 E44 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1007/s00181-018-1580-y

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