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Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada

Author

Listed:
  • Jongrim Ha

    (World Bank)

  • Inhwan So

    (Bank of Korea)

Abstract

We investigate the monetary policy transmission in a representative small open economy—Canada—over the 2000–17 period. By using a novel set of external instruments, we identify the impacts of domestic (Canada) and foreign (United States) monetary shocks on financial and macroeconomic variables in Canada in a unified structural VAR framework. Our results first confirm that domestic monetary policy transmission operates through interest rate, foreign exchange, and credit channels in Canada. The results further suggest that U.S. monetary policy shocks also have sizable effects on financial conditions in Canada, in line with the credit and risk-taking channels of international monetary spillovers. That said, the U.S. monetary spillovers into Canadian macroeconomic variables could be offset by the fluctuations in exchange rates and net exports in line with the trilemma hypothesis. Finally, our results are robust to various types of instrumental variables on monetary policy shocks.

Suggested Citation

  • Jongrim Ha & Inhwan So, 2023. "Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada," International Journal of Central Banking, International Journal of Central Banking, vol. 19(2), pages 389-472, June.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:2:a:8
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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