Using functional shocks to assess conventional and unconventional monetary policy in Canada

Abstract

We develop a new series of Canadian monetary policy shocks for the time period 1986 to 2023. Our shocks are constructed as the daily change in the Nelson–Siegel yield curve factors on days of monetary policy events such as announcements of the short-run policy rate and speeches by Bank of Canada officials. This allows us to look at both conventional and unconventional monetary policy. We find that tighter monetary policy lowers inflation and GDP. Monetary policy shocks, however, often twist the yield curve, potentially offsetting changes in the short-run policy rate. Finally, speeches also tend to move the yield curve with similar effects on inflation and GDP as formal policy announcements.