Risk Scenarios and Macroeconomic Impacts: Insights for Canadian Policy

This article analyzes the macroeconomic implications of risk scenarios for the Canadian economy using a vector autoregressive model. We focus on three scenarios: an aggressive monetary policy easing, an unexpected rise in oil prices, and a sudden slowdown in US economic activity. By illustrating how these scenarios would cause the economy to deviate from baseline macroeconomic forecasts, we demonstrate the value for policy-makers of assessing the potential outcomes of key shocks through this type of analysis. We highlight the varied impacts of these shocks—for example, the sensitivity of industrial production and housing markets to monetary easing, the demand-driven gains from rising oil prices, and the contractionary effects of a US recession. Structural decomposition reveals how specific shocks shape economic outcomes, offering insights into their transmission mechanisms. These findings underscore the importance of incorporating conditional forecasts into policy discussions to better understand the potential risks facing the Canadian economy.