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The Association Between U.S. and Canadian Prime Rate Changes

A change in the value of one variable often provides information about related variables. This study examines the degree to which changes in the prime interest rates in the United States and Canada are associated. Utilizing a sample of 321 prime rate changes in the two countries through the 197 months ending in May 1991, our analysis shows that nominal rates are generally higher in Canada, changes are more frequent in the U.S., and the average number of days between changes is longer in Canada. These observations suggest that Canadian prime rate changes are stickier than U.S. changes. Evidence of a long-run equilibrium relation is found indicating that U.S. and Canadian rates do not drift too far apart. However, the U.S. rate was found to adjust faster than the rate in Canada. Finally, prime rate decreases in Canada follow U.S. decreases within fifteen days. Canadian borrowers with rates tied to the prime could, therefore, consider short-term funds during the days immediately following a U.S. cut and then lock-in a lower longer-term rate once the Canadian prime rate falls.