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The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages

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  • Kimberly Beaton
  • René Lalonde
  • Stephen Snudden

Abstract

This paper examines the role of financial frictions in affecting the transmission of U.S. real and financial shocks to Canada using a dynamic stochastic general‐equilibrium model with an active banking sector and financial frictions. We find that the U.S. banking and interbank markets can be a potentially important source of variability of Canadian output and inflation—consistent with the financial crisis. The presence of both the demand and the real supply sides of credit in the model help to capture the stylized facts of both the domestic and the international business cycles. Le texte examine le rôle des frictions financières dans la transmission de chocs réels et financiers des États‐Unis vers le Canada à l'aide d'un modèle d’équilibre général dynamique et stochastique quand existent un secteur bancaire actif et des frictions financières. On découvre que le système bancaire et les marchés interbanques américains peuvent être une source potentiellement importante de variabilité du produit et de l'inflation au Canada – comme on l'a observé dans la crise financière récente. La présence à la fois de la demande et de l'offre de crédit dans le modèle aide à capter les faits stylisés des cycles d'affaires domestiques et internationaux.

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  • Kimberly Beaton & René Lalonde & Stephen Snudden, 2014. "The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(2), pages 466-493, May.
  • Handle: RePEc:wly:canjec:v:47:y:2014:i:2:p:466-493
    DOI: 10.1111/caje.12079
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    References listed on IDEAS

    as
    1. Kimberly Beaton & Brigitte Desroches, 2011. "Financial Spillovers Across Countries: The Case of Canada and the United States," Discussion Papers 11-1, Bank of Canada.
    2. René Lalonde & Dirk Muir, 2007. "The Bank of Canada's Version of the Global Economy Model (BoC-GEM)," Technical Reports 98, Bank of Canada.
    3. Mr. Vladimir Klyuev, 2008. "Real Implications of Financial Linkages Between Canada and the United States," IMF Working Papers 2008/023, International Monetary Fund.
    4. Andrea Gerali & Stefano Neri & Luca Sessa & Federico M. Signoretti, 2010. "Credit and Banking in a DSGE Model of the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(s1), pages 107-141, September.
    5. Stephen Murchison & Andrew Rennison, 2006. "ToTEM: The Bank of Canada's New Quarterly Projection Model," Technical Reports 97, Bank of Canada.
    6. Leonardo Gambacorta & David Marques-Ibanez, 2011. "The bank lending channel: lessons from the crisis [Financial intermediaries and monetary economics]," Economic Policy, CEPR;CES;MSH, vol. 26(66), pages 135-182.
    7. Ali Dib, 2010. "Banks, Credit Market Frictions, and Business Cycles," Staff Working Papers 10-24, Bank of Canada.
    8. Marc-André Gosselin & René Lalonde, 2005. "MUSE: The Bank of Canada's New Projection Model of the U.S. Economy," Technical Reports 96, Bank of Canada.
    9. Julio J. Rotemberg, 1982. "Monopolistic Price Adjustment and Aggregate Output," Review of Economic Studies, Oxford University Press, vol. 49(4), pages 517-531.
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    1. Kopoin, Alexandre, 2015. "Cross-border Banking, Spillover Effects and International Business Cycles," MPRA Paper 65515, University Library of Munich, Germany, revised 06 Apr 2015.
    2. Kolasa, Marcin, 2014. "Real convergence and its illusions," Economic Modelling, Elsevier, vol. 37(C), pages 79-88.
    3. Snudden, Stephen, 2016. "Cyclical fiscal rules for oil-exporting countries," Economic Modelling, Elsevier, vol. 59(C), pages 473-483.
    4. Montinari, Letizia & Stracca, Livio, 2016. "Trade, finance or policies: What drives the cross-border spill-over of business cycles?," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 131-148.
    5. Bandyopadhyay, Satiprasad & Jha, Ranjini & Kennedy, Duane, 2017. "The effect of the US subprime crisis on Canadian banks," Advances in accounting, Elsevier, vol. 36(C), pages 58-74.
    6. Fatemeh Razmi & Azali Mohamed & Lee Chin & Muzafar Shah Habibullah, 2017. "How Does Monetary Policy Affect Economic Vulnerability to Oil Price Shock as against US Economy Shock?," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 544-550.

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    More about this item

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E27 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Forecasting and Simulation: Models and Applications
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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