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Real-Financial Linkages in the Canadian Economy: An Input-Output Approach

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  • Secrieru, Oana
  • Leung, Danny

Abstract

The purpose of this paper is twofold. First, the authors provide a detailed social accounting matrix (SAM), which incorporates the income and financial flows into the standard input-output matrix, for the Canadian economy for 2004. Second, they use the SAM to assess the strength of the real-financial linkages by calculating and comparing real SAM multipliers and financial social accounting matrix (FSAM) multipliers. For FSAM multipliers, financial flows are endogenous, whereas for real SAM multipliers they are not. The results show that taking into account financial flows increases the impact of a final demand shock on Canadian output. Financial flows also play an important role in determining the cumulative effect of an income shock or the availability of investment funds. Between 2008 and the first half of 2009, financial institutions shifted their investments toward government bonds, short-term paper, and foreign investments. This shift together with the fact that non-financial institutions were unwilling or unable to increase their financial liabilities, led to estimated declines in all GDP multipliers between 2008 and the first half of 2009 (2009H1). The main advantage of using the extended input-output analysis is that it provides a simple framework, with very few assumptions, which allows the assessment of the strength of real-financial linkages by means of multipliers. However, the methodology is subject to the Lucas critique, that as shocks shift prices, agents cannot adjust. Such a framework is, nevertheless, appropriate in short-term impact analysis such as this study.

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Bibliographic Info

Paper provided by Statistics Canada, Analytical Studies Branch in its series Economic Analysis (EA) Research Paper Series with number 2010065e.

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Date of creation: 20 May 2011
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Handle: RePEc:stc:stcp5e:2010065e

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Related research

Keywords: Business performance and ownership; Economic accounts; Financial statements and performance; Input-output accounts;

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  1. Brian Wixted & Norihiko Yamano & Colin Webb, 2006. "Input-Output Analysis in an Increasingly Globalised World: Applications of OECD's Harmonised International Tables," OECD Science, Technology and Industry Working Papers 2006/7, OECD Publishing.
  2. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
  3. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  4. Rispoli, Luke, 2009. "Trends in Gross Domestic Product and Self-employment of Unincorporated Enterprises in the Canadian Economy, 1987 to 2005," Insights on the Canadian Economy 2009024e, Statistics Canada, Economic Analysis.
  5. Marcel Timmer & Pirkko Aulin-Ahmavaara, 2007. "New Developments in Productivity Analysis within an Input-Output Framework: an Introduction," Economic Systems Research, Taylor & Francis Journals, vol. 19(3), pages 225-227.
  6. Thorbecke, Erik & Jung, Hong-Sang, 1996. "A multiplier decomposition method to analyze poverty alleviation," Journal of Development Economics, Elsevier, vol. 48(2), pages 279-300, March.
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