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A new theory of the term structure of interest rates for small open economies has been developed in which a small country with internationally integrated capital markets will have its domestic financial markets dominated by international influences. the international theory of the term structure of interest rates demonstrates how a foreign financial disturbance will directly affect domestic real and nominal interest rates and exchange rates which then affect the price and output channels. We employ univariate and multivariate time series analysis to Canada and the United States to test the imported term structure of interest rates hypothesis. We do not find evidence to support the assumption of proportionality between the countries' term structures.

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