Working Paper: NBER ID: w14547
Authors: Alejandro Justiniano; Bruce Preston
Abstract: This paper demonstrates that an estimated, structural, small open economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence.
Keywords: small open economy; foreign disturbances; U.S. shocks; Canada; business cycles
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| correlated shocks (C10) | model predictions (C59) |
| U.S. shocks (N22) | Canadian economic fluctuations (N12) |
| U.S. shocks (N22) | variability in Canadian macroeconomic series (N12) |