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An empirical study of credit shock transmission in a small open economy

Nathan Bedock and Dalibor Stevanovic ()

Canadian Journal of Economics, 2017, vol. 50, issue 2, 541-570

Abstract: In this paper, we identify and estimate the dynamic effects of foreign (US) and national (Canadian) credit shocks in a small open economy. We use standard credit spreads as proxies to the external finance premium. Our first result suggests that the US and Canadian credit spreads contain substantial forecasting power for several measures of the Canadian real economic activity, especially during the recent financial crisis and its aftermath. Secondly, an adverse US credit shock generates a significant and persistent economic slowdown in Canada: the national external finance premium rises immediately while interest rates, credit aggregates, output and employment indicators decline. Variance decomposition reveals that credit shocks have a sizeable effect on real activity measures, leading indicators and credit spreads. Yet, the unexpected shocks in domestic credit spreads are not able to generate any significant dynamic response of the real activity once we control for the US credit market conditions.

JEL-codes: E32 (search for similar items in EconPapers)
Date: 2017
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Journal Article: An empirical study of credit shock transmission in a small open economy (2017) Downloads
Working Paper: An Empirical Study of Credit Shock Transmission in a Small Open Economy (2012) Downloads
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