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Monetary Transmission Mechanism in a Small Open Economy: A Bayesian Structural VAR Approach

  • Rokon Bhuiyan


    (Queen's University)

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    This paper develops an open-economy Bayesian structural VAR model for Canada in order to estimate the effects of monetary policy shocks, using the overnight target rate as the policy instrument. I allow the policy variable and the financial variables of the model to interact simultaneously with each other and with a number of other home and foreign variables. When I estimate this over-identified VAR model, I find that the policy shock transmits to real output through both the interest rate and exchange rate channels, and the shock does not induce a departure from uncovered interest rate parity. I also find that the impulse response of the monetary aggregate, M1, does not exactly follow the impulse response of the target rate. Finally, I find that Canadian variables significantly responds to the US federal funds rate shock, and external shocks are an important source of Canadian output fluctuations.

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    Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1183.

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    Length: 25 pages
    Date of creation: Oct 2008
    Date of revision:
    Handle: RePEc:qed:wpaper:1183
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