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Sources and Propagation Mechanims of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis


  • Alejandro Justiniano


This paper uses dynamic factor analysis to investigate the sources of foreign shocks and the propagation mechanism of these disturbances into two small open economies, Australia and Canada. Panels including a variety of foreign and domestic series for each country are used to estimate the factors. The specification of dynamics permits the computation of impulse responses which are used to suggest a structural interpretation of the factors. A small open economy model of the New Open Economy Macroeconomics is calibrated to contrast theoretical and empirical impulse responses. The results reveal that innovations in highly integrated equity markets are associated with comovements in investment which are crucial in explaining the cofluctuations in economic activity across countries. Therefore, the omission of traded capital goods in small open economy models represents an important shortcoming of theoretical frameworks in the literature

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  • Alejandro Justiniano, 2004. "Sources and Propagation Mechanims of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis," Econometric Society 2004 Latin American Meetings 148, Econometric Society.
  • Handle: RePEc:ecm:latm04:148

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    Cited by:

    1. Jean Boivin & Marc P. Giannoni, 2007. "Global Forces and Monetary Policy Effectiveness," NBER Chapters,in: International Dimensions of Monetary Policy, pages 429-478 National Bureau of Economic Research, Inc.
    2. Belviso Francesco & Milani Fabio, 2006. "Structural Factor-Augmented VARs (SFAVARs) and the Effects of Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 6(3), pages 1-46, December.

    More about this item


    Open Economy Macroeconomics Factor Analysis; Gibbs Sampling;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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