Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?
46 Pages Posted: 5 Dec 2009
There are 2 versions of this paper
Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?
Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?
Date Written: November 30, 2009
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: Business Cycles, Open Economy Macroeconomics, Bayesian Estimation, International Comovement
JEL Classification: E30, F41
Suggested Citation: Suggested Citation
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