Abstract
This paper reexamines the linkage of real interest rates between the US and Canada. After examining the existence of a one-to-one long-run relationship between these two interest rates, we assess the degree of departure from the long-run relationship and the speed of adjustment to it following an exogenous shock in one of the markets. Our empirical results, based on data from approximately two decades, indicate that: (i) there exists a one-to-one long-run relationship and (ii) the extent of departure is small compared with the magnitude of a shock and the departure decays within a reasonably small number of periods.
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