The Propagation of U.S. Shocks to Canada: Understanding the Role of Real-Financial Linkages

Kimberly Beaton, René Lalonde and Stephen Snudden

Staff Working Papers from Bank of Canada

Abstract: This paper examines the transmission of U.S. real and financial shocks to Canada and, in particular, the role of financial frictions in affecting the transmission of these shocks. These questions are addressed within the Bank of Canada's Global Economy Model (de Resende et al. forthcoming), a dynamic stochastic general-equilibrium model with an active banking sector and a detailed role for financial frictions. We find that U.S. financial shocks, as well as real shocks, have important effects on the Canadian economy. Moreover, financial frictions on both the demand and supply sides of credit amplify the first round impact of all types of U.S. shocks on the U.S. economy, as well as the second round impact on Canada. Real-financial linkages also increase the persistence of the Canadian response to U.S. shocks. We find that the interaction between the endogenous response of commodity prices and U.S. financial frictions plays an important role in the propagation of U.S. shocks to the Canadian economy. Finally, real-financial linkages also help to generate the positive cross correlation between domestic demand in the United States and Canada observed in the data, which is difficult to explain with a model where the transmission of shocks between countries is only based only on trade.

Keywords: Business fluctuations and cycles; Economic models; International topics (search for similar items in EconPapers)
JEL-codes: E21 E27 E32 F36 F40 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2010
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge, nep-mac and nep-opm
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages (2014)
Journal Article: The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:10-40

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