Global Risk Shocks in a Small Open Economy and Their Impact on Monetary Policy Surprises

Juan Michelsen

No 93, Berlin School of Economics Discussion Papers from Berlin School of Economics

Abstract: This paper studies the macroeconomic effects of global risk shocks (GRS) in a small open economy and their implications for the identification of monetary policy shocks. I construct a novel proxy for GRS based on unexpected daily innovations in the VIX and employ it as an external instrument in a proxy-SVAR for Canada. The advantage of this proxy is that, by exploiting the safe-haven role of the U.S. dollar, it identifies the effects of GRS using only domestic endogenous variables, without imposing restrictions or relying on global aggregates or narratively selected events. GRS that depreciate the Canadian dollar, tighten financial conditions, reduce asset prices, output, and prices, inducing an expansionary monetary policy response. I provide evidence that high-frequency (HF) monetary policy surprises partly reflect endogenous, risk-driven deviations between policy actions and market expectations. Ignoring GRS can lead to an overestimation of monetary policy effects obtained using HF identification.

Keywords: global risk shocks; small open economy; proxy-SVAR; monetary policy surprises (search for similar items in EconPapers)
JEL-codes: E52 F41 F42 F44 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2026-02-19
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Persistent link: https://EconPapers.repec.org/RePEc:bdp:dpaper:0093

DOI: 10.48462/opus4-6165

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