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Real Implications of Financial Linkages Between Canada and the United States

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  • Vladimir Klyuev

Abstract

This paper documents the extent of financial linkages between Canada and the United States and explores the impact of changes in U.S. financial conditions on financial conditions and real economic activity in Canada. It shows that close to a quarter of financing by Canadian corporations is raised south of the border. Empirical analysis using structural vector autoregressions establishes that a tightening in U.S. financial conditions has significant implications for real activity in Canada. For example, a percentage point increase in the 3- month T-bill rate, other things being equal, leads to a decline of slightly more than one percentage point in Canada''s real GDP growth after 3 quarters. That decline can be decomposed into three channels: the direct financial channel, where the slowdown is attributed to a rising cost of funds for Canadian companies raising capital in the United States; the indirect financial channel, where growth is hampered as financial conditions in Canada tighten in response to a tightening in the United States; and the trade channel, which goes through a slowing in the U.S. economy, and correspondently lower demand for Canadian exports. As would be expected from the high degree of reliance on U.S. financing, the direct financial channel proves dominant in the short term.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/23.

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Length: 52
Date of creation: 01 Jan 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/23

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Keywords: Economic conditions; gdp growth; real gdp; bonds; stock prices; corporate bonds; stock price; bond; growth rate; growth rates; foreign bonds; stock market; financial markets; financial corporations; gdp growth rate; business cycle; stock price indices; term bond; effective interest rate; financial institutions; government bond; portfolio investment; long-term bond yields; flexible exchange rates; dollar bonds; bond financing; financial structure; stock indices; financial sector; international financial statistics; gdp growth rates; equity valuation; bond issuance; business cycles; stock valuation; bond spreads; bond yields; high-yield bond; equity market;

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References

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  1. Christian Calmès, 2004. "Regulatory Changes and Financial Structure: The Case of Canada," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(I), pages 1-35, March.
  2. James H. Stock & Mark W. Watson, 2002. "Has the Business Cycle Changed and Why?," NBER Working Papers 9127, National Bureau of Economic Research, Inc.
  3. Ambler, Steve & Cardia, Emanuela & Zimmermann, Christian, 2004. "International business cycles: What are the facts?," Journal of Monetary Economics, Elsevier, vol. 51(2), pages 257-276, March.
  4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  5. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  6. William English & Kostas Tsatsaronis & Edda Zoli, 2005. "Assessing the predictive power of measures of financial conditions for macroeconomic variables," BIS Papers chapters, in: Bank for International Settlements (ed.), Investigating the relationship between the financial and real economy, volume 22, pages 228-52 Bank for International Settlements.
  7. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  8. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  9. Sellin, Peter, 2001. " Monetary Policy and the Stock Market: Theory and Empirical Evidence," Journal of Economic Surveys, Wiley Blackwell, vol. 15(4), pages 491-541, September.
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Cited by:
  1. International Monetary Fund, 2009. "Decoupling From the East toward the West? Analyses of Spillovers to the Baltic Countries," IMF Working Papers 09/125, International Monetary Fund.
  2. Tamim Bayoumi & Andrew Swiston, 2008. "Spillovers Across Nafta," IMF Working Papers 08/3, International Monetary Fund.
  3. Kingsley I. Obiora, 2010. "Do countries catch cold when trading partners sneeze? Evidence from spillovers in the Baltics," Financial Theory and Practice, Institute of Public Finance, vol. 34(2), pages 143-160.
  4. P. Siklos, B. Lavender, 2014. "The Credit Cycle And The Business Cycle In Canada And The U.S.: Two Solitudes," LCERPA Working Papers wm0065, Laurier Centre for Economic Research and Policy Analysis.
  5. Rupa Duttagupta & N. Barrera, 2010. "The Impact of the Global Crisison Canada," IMF Working Papers 10/5, International Monetary Fund.
  6. Jean Louis, Rosmy & Brown, Ryan & Balli, Faruk, 2011. "On the Feasibility of Monetary Union: Does It Make Sense to Look for Shocks Symmetry across Countries When None of the Countries Constitutes an Optimum Currency Area?," MPRA Paper 39942, University Library of Munich, Germany.
  7. Yan Sun & Wendell A. Samuel, 2009. "ECCU Business Cycles," IMF Working Papers 09/71, International Monetary Fund.
  8. Louis, Rosmy J & Brown, Ryan & Balli, Faruk, 2009. "Are Mortgage Rates Bubbling Up Trouble for Canadas Metropolitan Housing Sector?," MPRA Paper 17245, University Library of Munich, Germany.

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