The Impact of the Global Business Cycle on Small Open Economies: A FAVAR Approach for Canada
AbstractBuilding on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, we use a factor-augmented VAR (FAVAR) model with more than 260 series for 20 OECD countries to analyze how global developments affect the Canadian economy. We focus on several sources of shocks, including commodity prices, foreign economic activity, and foreign interest rates. We evaluate the impact of each shock on key Canadian macroeconomic variables to provide a comprehensive picture of the effect of international shocks on the Canadian economy. Our findings indicate that Canada is primarily exposed to shocks to foreign activity and to commodity prices. In contrast, the impact of shocks to global interest rates or global inflation is substantially lower. Our findings also expose the different channels through which higher commodity prices impact the Canadian economy: Canada benefits from higher commodity prices through a positive terms of trade shock, but at the same time, higher commodity prices tend to lower global economic activity, hurting demand for Canadian exports.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 11-2.
Length: 32 pages
Date of creation: 2011
Date of revision:
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International topics; Econometric and statistical methods; Business fluctuations and cycles;
Other versions of this item:
- Vasishtha, Garima & Maier, Philipp, 2013. "The impact of the global business cycle on small open economies: A FAVAR approach for Canada," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 191-207.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-12 (All new papers)
- NEP-BEC-2011-02-12 (Business Economics)
- NEP-CBA-2011-02-12 (Central Banking)
- NEP-MAC-2011-02-12 (Macroeconomics)
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