The Impact of the Global Crisison Canada: What Do Macro-Financial Linkages Tell Us?
This paper builds a Bayesian VAR estimation model of growth for Canada, by focusing specifically on the role of external and domestic financial indicators, including credit conditions. A variance decomposition shows that financial conditions explain one-third of the total variability in Canada''s real GDP growth, although changes in U.S. real GDP growth still account for a larger share of volatility in Canadian growth. A macro-financial conditions index built from the VAR''s impulse responses shows that U.S. real GDP growth and lending standards will increasingly bear on Canada''s growth, implying that a normalization of the U.S. economic and financial conditions is key for a sustained recovery in Canada.
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