Empirical Analysis of Canadian Interest Rates Since 1970

Empirical Analysis of Canadian Interest Rates Since 1970
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Empirical Analysis of Canadian Interest Rates Since 1970
Introduction
The relationship between short-term and long-term interest rates is of interest to economists and investors because it influences the welfare of a country’s banking institution, the value of bond portfolios situated in different types of trust funds, the cost of servicing the national debt, as well as future net premium expenses on life insurance policies, among other concerns. For economists, the relationship between long-term and short-term interest rates is central to macroeconomic policy evaluation while for investors, it is critical to projecting the inflection points in an interest cycle and even hedging against far-reaching changes in interest levels. This topic is therefore worth discussing because it answers to The goal of this empirical analysis of Canadian interest rates since 1970 is to verify the with the purpose of verifying a positive correlation between the two. An empirical analysis of this kind is important because it will allow me to examine if there is a positive correlation between long and short term interest rates.
If there is a positive correlation between the two, it is possible to speculate on long term interest rates based on the current short term interest rates and so make informed decisions on future long-term investments. While a number of economists have identified differences between long and short term interest rates, a significant proportion of them also tend to generalize interest rates without making any distinction between the two. The few who identify differences between long and short term interest rates tend to do so lightly and therefore, a more thorough investigation of the positive correlation between the two interest rates is of prime importance from an investment perspective. The next section is the methodology where in addition to restating the purpose of the essay, real world data will be applied to test the expectation theory (the theory undergirding the essay). Real world data will constitute long and short term interest rates for Canada from 1970. The essay will strive to examine if the actual interest rates are consistent with the expectation theory and how well they fit into the latter. This will be followed by an explanation of my understanding of the real world data in relation to how it applies to the expectation theory.
Tied to this subsection will be a brief summary of the theory and how it can help make me make predictions and analysis. The analysis section will involve testing hypotheses and unraveling the empirical relationship between long term interest rates and short term interest rates. It will also involve analyzing identified assumptions and exploring the validity of the theory itself as relates to making predictions of future interest rates to guide investment decisions. All sources of error together with any discrepancies with the real time encountered during analysis will also be acknowledged.
Methodology
The main purpose of this paper is to conduct an empirical analysis of Canadian interest rates since 1970 wi...