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Global Risk Shocks in a Small Open Economy and Their Impact on Monetary Policy Surprises

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  • Juan Michelsen

Abstract

This paper studies the macroeconomic effects of global risk shocks (GRS) in a small open economy and their implications for the identification of monetary policy shocks. I construct a novel proxy for GRS based on unexpected daily innovations in the VIX and employ it as an external instrument in a proxy-SVAR for Canada. The advantage of this proxy is that, by exploiting the safe-haven role of the U.S. dollar, it identifies the effects of GRS using only domestic endogenous variables, without imposing restrictions or relying on global aggregates or narratively selected events. GRS that depreciate the Canadian dollar, tighten financial conditions, reduce asset prices, output, and prices, inducing an expansionary monetary policy response. I provide evidence that high-frequency (HF) monetary policy surprises partly reflect endogenous, risk-driven deviations between policy actions and market expectations. Ignoring GRS can lead to an overestimation of monetary policy effects obtained using HF identification.

Suggested Citation

  • Juan Michelsen, 2026. "Global Risk Shocks in a Small Open Economy and Their Impact on Monetary Policy Surprises," Berlin School of Economics Discussion Papers 0093, Berlin School of Economics.
    • Handle: RePEc:bdp:dpaper:0093
    DOI: 10.48462/opus4-6165
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    References listed on IDEAS

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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