Visiting Speaker Nov. 22, 2018
How do Foreign Holdings in Canadian Bonds Affect Domestic Interest Rates and House Prices?
Department of Economics
Dr. Gabriel Bruneau
Thursday Nov. 22, 2018
4:00 pm - 5:30 pm
This paper studies whether inflows of foreign capital in Government of Canada and corporate bonds can explain part of the decline in Canadian interest rates and the rise in housing price since the 2008-09 global financial crisis. The aftermath of the recent global financial crisis was characterized by an environment of low interest rate and a rapid increase in housing market activity across OECD countries, including Canada. The low degree of financial development in emerging market economies, the scarcity of safe assets and the flight to safety could have led higher capital inflows to developed countries, depressing long-term interest rates and stimulating an increase in the demand for housing. For the advanced economies, we find a positive association between large capital inflows, mostly by bank and portfolio flows, and booms in housing prices. For Canada, our results suggest that the large inflows of foreign capital in Canada’s domestic bonds could have lowered on average five-year Government of Canada bond yields by 70 basis points, five-year corporate bond yields by 10 basis points and five-year mortgage rates by 40 basis points between July 2009 and June 2017. For Government of Canada bond yields, this amounts to roughly half of the total decline experienced over the post-crisis period, and the decrease in mortgage rate have helped push the demand for housing, contributing to house price increase.
Gabriel Bruneau is a Principal Economist in the Financial Markets Department at the Bank of Canada. He is a macroeconomist and an applied econometrician whose primary research interests center on the monetary economics, the housing market and macroprudential policies, the development of nonlinear estimation methods in econometrics, and the effects of capital flows on the financial stability. He received his Ph.D. in economics from the University of Montreal.