Canadian monetary policy and the US federal funds rate

Abstract

This article examines the empirical relation between the Canadian overnight rate and the US federal funds rate over the period 1975 to 2005. There is evidence of cointegration in the earlier part of the period from 1975 to 1988, but not in the post-1988 period to date. The inference is that the Bank of Canada has been pursuing monetary policy independently of the USA at least during the 1988 to 2005 period.

Notes

¹ The source of the federal funds rate data is FRED, Federal Reserve Bank of St. Louis.

² Estimations were made using EViews4 (Quantitative Micro Software).

³ The period of monetary gradualism in Canada is usually dated from the so-called ‘Saskatoon Manifesto’ (a speech by Governor Bouey in September 1975). As data is available beginning in January 1975, however, we make use of the extra observations starting with that date.