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Monetary Policy Transmission in Canada – A High Frequency Identification Approach

  • Matt Soosalu ORCID logo EMAIL logo
Published/Copyright: August 2, 2024
The B.E. Journal of Macroeconomics
From the journal The B.E. Journal of Macroeconomics Volume 24 Issue 2

Abstract

I study the effects of monetary policy shocks in Canada on economic and financial variables. With a narrow window around a policy announcement, I create a new set of intraday level, high-frequency monetary policy surprises using the three-month Canadian Bankers’ acceptance rate futures. I use this measure to identify monetary policy shocks as an external instrument in a monthly VAR. Following a 25 basis point contractionary policy shock, I find that the decline in output is more powerful and peaks earlier than previous empirical works show, with a peak decline of 0.5 % points after 18 months. Price level declines are similarly more powerful and earlier, reaching a decline of 0.3 % points after 24 months. In addition, increases in the credit and mortgage spreads indicate the presence of a domestic credit channel of monetary policy transmission for Canada. Finally, I show that the surprise measure is robust to information effects.

Keywords: monetary policy surprises; structural VAR; small open economy; monetary policy transmission; high-frequency identification
JEL Classification: E31; E43; E44; E52; E58
Corresponding author: Matt Soosalu, PhD Candidate, Carleton University, Ottawa, ON, Canada, E-mail: 

I would like to thank Hashmat Khan for helpful comments and suggestions throughout the project. I received helpful feedback from Chris Gunn, Francesca Rondina, Casey Pender, Mamoon Kader, Xu Zhang and the Carleton Economics PSW group. Data access for the intraday BAX is from www.stockwatch.com. I use their trader workstation to access data on the day of interest. Permission is given to share only the final data output. All errors are my own.

Appendix: Data Transformations

The following data was used in the paper with listed transformations:

  1. GDP – Monthly data 1997: 1 – 2019: 12. Stats Canada 2012 chained dollars table: 3610043401 2012 = 100 index, log(x)*100 transformation. Seasonally adjusted.

  2. CPI – Monthly data 1997: 1 – 2019: 12. Stats Canada, table 1810000401, log(x)*100 transformation. Not seasonally adjusted 2002 = 100.

  3. Unemployment – Monthly data 1997: 1 – 2019: 12. FRED: LRUNTTTTCAM156S seasonally adjusted.

  4. Credit Spread – Three-month corporate credit measure minus three-month treasury bill rate. For 2019, three-month bankers acceptance rate used instead of corporate credit rate. Stats Canada table 1010012201.

  5. Mortgage Spread – Five year fixed mortgage rate minus five year government bond rate. Stats Canada table 3410014501 and 1010012201.

  6. Excess Bond Premium – Monthly 1999: 1–2015: 6. From Leboeuf and Pinnington (2017).

  7. BAX intraday – Stockwatch.com. 2004–2019 intraday data, quarterly contracts h,m,u,z. Accessed through the trader workstation. Permission given to share final data set.

  8. BAX (generic measure) – Daily 2000–2020. Bloomberg (BA1) generic measure. Accessed using Bloomberg Terminal.

  9. Exchange Rate – BiS narrow measure. Nominal exchange rate index, composite measure of weighted averages. log(x)*100 transformation. Increase represents appreciation of domestic currency.

  10. One Year Treasury Bill – Daily rate, averaged to monthly. 1997–2019: 12. Stats Canada table 1010013901.

  11. BAA Spread – Monthly data 1997: 1 – 2019: 12. FRED, BAA10YM. BAA minus 10 year bond.

  12. Exports – Monthly data 1991: 1–2019: 12. Stats Canada, table 1210001101, 2012 = 100 own index. Seasonally adjusted, balance of payments, ln(x)*100 transformation.

  13. Stock Price Index – Monthly data 1991–2019: 12. Stats Canada, table 1010012501, 2005 = 100 own index, ln(x)*100 transformation.

  14. Credit Index – Monthly data. Credit liabilities chartered banks, non-mortgage loan. Deflated with CPI. Stats Canada table 3610064001. ln(x)*100 transformation.

  15. Overnight daily rate – Daily rate 2000–2019. Stats Canada table 1010013901.

  16. Economic Uncertainty – Canadian policy uncertainty from Baker, Bloom, and Davis (2016). For the Canadian data and details see their website.

A Figure

Figure A.1: Daily open interest and volume traded of the three month bankers’ acceptance generic measure. Data from Bloomberg Terminal.
Figure A.1:

Daily open interest and volume traded of the three month bankers’ acceptance generic measure. Data from Bloomberg Terminal.

Figure A.2: Number of trades per contract type on each policy announcement day.
Figure A.2:

Number of trades per contract type on each policy announcement day.

Figure A.3: Monetary surprise measure. First contract represents closest to expiration, second the next closest, and so forth.
Figure A.3:

Monetary surprise measure. First contract represents closest to expiration, second the next closest, and so forth.

B Tables

Table B.1:

Time-spread of contracts around policy announcements.

Year BAX1 BAX2 BAX3 BAX4
2004 00:33:02 00:31:52 00:33:32 00:39:06
(00:30:22, 00:36:30) (00:30:12, 00:34:47) (00:31:12, 00:36:22) (00:30:45, 00:50:25)
2005 00:39:57 00:36:22 00:32:11 00:41:51
(00:30:20, 01:23:41) (00:30:20, 00:50:11) (00:30:41, 00:36:28) (00:30:22, 00:55:45)
2006 00:41:32 00:33:32 00:35:09 00:37:29
(00:30:47, 00:58:28) (00:30:17, 00:38:12) (00:30:19, 00:44:44) (00:30:19, 00:57:55)
2007 00:38:52 00:33:33 00:35:14 00:40:50
(00:31:09, 01:03:22) (00:30:54, 00:36:50) (00:30:47, 00:43:37) (00:31:18, 01:02:10)
2008 00:34:12 00:33:26 00:33:11 00:42:08
(00:31:51, 00:38:49) (00:30:02, 00:42:26) (00:30:31, 00:37:20) (00:32:05, 00:56:13)
2009 01:09:20 00:33:28 00:37:17 00:44:53
(00:31:23, 02:27:32) (00:30:03, 00:40:17) (00:30:28, 00:49:10) (00:30:54, 01:25:18)
2010 00:47:42 00:32:49 00:32:48 00:35:02
(00:33:32, 01:42:07) (00:30:50, 00:35:29) (00:30:40, 00:36:58) (00:30:12, 00:52:56)
2011 00:37:35 00:34:51 00:32:00 00:33:15
(00:30:28, 00:51:05) (00:30:25, 00:38:17) (00:30 :40, 00:35:13) (00:30:26, 00:42:07)
2012 00:49:43 00:41:28 00:37:41 00:36:41
(00:30:39, 02:01:52) (00:30:30, 01:00:32) (00:30:52, 00:51:26) (00:30:10, 00:53:00)
2013 01:02:29 00:37:08 00:41:16 00:39:42
(00:30:59, 03:27:56) (00:31:29, 00:46:32) (00:31:38, 01:11:43) (00:31:36, 00:50:43)
2014 01:03:38 00:36:07 00:37:33 00:35:18
(00:33:11, 01:28:16) (00:30:10, 00:49:03) (00:30:12, 00:59:46) (00:31:48, 00:40:01)
2015 00:48:34 00:34:40 00:32:51 00:33:30
(00:30:24, 02:11:15) (00:30:07, 00:46:15) (00:30:08, 00:39:50) (00:30:33, 00:36:51)
2016 00:38:25 00:32:55 00:36:40 00:36:20
(00:30:03, 00:52:15) (00:30:18, 00:49:01) (00:30:14, 00:45:18) (00:31:38, 00:45:35)
2017 00:35:59 00:32:36 00:32:17 00:36:00
(00:30:31, 00:45:00) (00:30:12, 00:39:00) (00:30:30, 00:35:17) (00:30:29, 00:48:36)
2018 00:35:29 00:32:00 00:33:33 00:33:13
(00:30:37, 00:44:43) (00:30:06, 00:38:01) (00:30:22, 00:38:17) (00:30:52, 00:37:40)
2019 00:35:59 00:32:05 00:35:18 00:32:41
(00:31:17, 00:43:17) (00:30:34, 00:35:43) (00:30:28, 00:45:39) (00:31:25, 00:33:37)

  1. Average time spread listed across each contract and each year. Minimum and maximum window size within each year for each contract is reported as well.

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Supplementary Material

This article contains supplementary material (https://doi.org/10.1515/bejm-2023-0212).

Received: 2023-12-18
Accepted: 2024-05-24
Published Online: 2024-08-02

© 2024 Walter de Gruyter GmbH, Berlin/Boston

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity
  4. Contributions
  5. Endogenous Financial Friction and Growth
  6. Decomposing Structural Change
  7. Industry Impacts of US Unconventional Monetary Policy
  8. Monetary Policy Transmission in Canada – A High Frequency Identification Approach
  9. Child Labor, Corruption, and Development
  10. Inflation Uncertainty from Firms’ Perspective, Overconfidence and Credibility of Monetary Policy
  11. Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?
  12. To Create or to Redistribute? That is the Question
  13. Estimating Expected Asset Returns with the Present Value Model of Consumption and Fed Forecasts
https://doi.org/10.1515/bejm-2023-0212
Keywords for this article
monetary policy surprises; structural VAR; small open economy; monetary policy transmission; high-frequency identification

Articles in the same Issue

  1. Frontmatter
  2. Advances
  3. Corporate Tax Rates, Allocative Efficiency, and Aggregate Productivity
  4. Contributions
  5. Endogenous Financial Friction and Growth
  6. Decomposing Structural Change
  7. Industry Impacts of US Unconventional Monetary Policy
  8. Monetary Policy Transmission in Canada – A High Frequency Identification Approach
  9. Child Labor, Corruption, and Development
  10. Inflation Uncertainty from Firms’ Perspective, Overconfidence and Credibility of Monetary Policy
  11. Does Nominal Wage Stickiness Affect Fiscal Multiplier in a Two-Agent New Keynesian Model?
  12. To Create or to Redistribute? That is the Question
  13. Estimating Expected Asset Returns with the Present Value Model of Consumption and Fed Forecasts
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