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Risk Scenarios and Macroeconomic Impacts: Insights for Canadian Policy

Author

Listed:
  • Kevin Moran
  • Dalibor Stevanovic
  • Stéphane Surprenant

Abstract

This paper analyzes the macroeconomic implications of various risk scenarios for the Canadian economy, employing a Vector Autoregressive (VAR) model. We focus on three such scenarios: an aggressive monetary policy easing, an unexpected rise in oil prices and a sudden slowdown in U.S. economic activity. By illustrating how these scenarios would lead 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, such as 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 U.S. recession. Structural decomposition reveals how specific shocks shape economic outcomes, providing insights into their transmission mechanisms. These findings emphasize the importance of incorporating conditional forecasts into policy discussions to better understand potential risks facing the Canadian economy. Cet article analyse les implications macroéconomiques de divers scénarios de risque pour l'économie canadienne, en utilisant un modèle vectoriel autorégressif (VAR). Nous nous concentrons sur trois de ces scénarios : un assouplissement agressif de la politique monétaire, une hausse inattendue des prix du pétrole et un ralentissement soudain de l'activité économique aux États-Unis. En illustrant comment ces scénarios conduiraient l'économie à s'écarter des prévisions macroéconomiques de base, nous démontrons l'intérêt, pour les décideurs politiques, d'évaluer les résultats potentiels de bouleversements majeurs par le biais de ce type d'analyse. Nous mettons en évidence les impacts variés de ces bouleversements, tels que la sensibilité de la production industrielle et des marchés du logement à l'assouplissement monétaire, les gains liés à la demande résultant de l'augmentation des prix du pétrole et les effets de contraction d'une récession aux États-Unis. La décomposition structurelle révèle comment des bouleversements spécifiques façonnent les résultats économiques, ce qui permet de mieux comprendre leurs mécanismes de transmission. Ces résultats soulignent l'importance d'incorporer des prévisions conditionnelles dans les discussions politiques afin de mieux comprendre les risques potentiels auxquels l'économie canadienne est confrontée.

Suggested Citation

  • Kevin Moran & Dalibor Stevanovic & Stéphane Surprenant, 2024. "Risk Scenarios and Macroeconomic Impacts: Insights for Canadian Policy," CIRANO Working Papers 2024s-03, CIRANO.
  • Handle: RePEc:cir:cirwor:2024s-03
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    References listed on IDEAS

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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