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Can Structural Small Open Economy Models Account For The Influence Of Foreign Disturbances?

  • Alejandro Justiniano

    ()

  • Bruce Preston

    ()

This paper evaluates whether an estimated, structural, small open economy model of the Canadian economy can account for the substantial influence of foreign-sourced disturbances indentified in numerous reduced-form studies. The analysis shows that the benchmark model - and a number of variants which include a range of market imperfections - imply cross-equation restrictions and therefore capture certain properties of the data - for instance, the volatility and persistence of the real exchange rate - and yield plausible parameter estimates, this success is qualified by the model's inability to account for the transmission of foreign disturbances to the domestic economy: less than one percent of the variance of output is explained by foreign shocks.

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File URL: http://cbe.anu.edu.au/research/papers/camawpapers/Papers/2006/Justiniano_Preston_122006.pdf
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Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2006-12.

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Length: 51 pages
Date of creation: Apr 2006
Handle: RePEc:een:camaaa:2006-12
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