Economic Policies and Financial Market Integration : What Can We Learn from Interest Rate Differentials?

This paper reviews the state of theoretical and empirical economic knowledge regarding interest rate differentials (and other deviations from international non arbitrage conditions). It emphasizes in particular what can be learned from these differentials in relation to the conduct of fiscal and monetary policy in the context of small open economies such as Quebec and Canada. The determination of interest rates and their interaction with fiscal and monetary policy are discussed and some important empirical results are surveyed