Can structural small open economy models account for the influence of foreign disturbances?

Alejandro Justiniano and Bruce Preston

No WP-09-19, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence.

Keywords: Economic; conditions (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Can structural small open-economy models account for the influence of foreign disturbances? (2010)
Working Paper: Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances? (2008)
Working Paper: CAN STRUCTURAL SMALL OPEN ECONOMY MODELS ACCOUNT FOR THE INFLUENCE OF FOREIGN DISTURBANCES? (2006)
Working Paper: Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances? (2006)
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