THE IMPACT OF UNITED-STATES ECONOMIC VARIABLES ON BANK-OF-CANADA POLICY - DIRECT AND INDIRECT RESPONSES

The impact of US economic variables on Canadian monetary policy is assessed using quarterly data for 1963-88. Canadian monetary base growth is regressed upon the least-squares predictors of 11 US and Canadian variables using a generalized least squares procedure that permits isolation of (i) direct responses by the monetary authority to its expectations of the US variables, and (ii) indirect responses to past US influences that impact upon the current fitted values of the Canadian variables. The results reveal significance of both direct and indirect US influences on Canadian policy across fixed and floating exchange rate regimes.