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
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://doi.org/10.1111/caje.12269 (text/html)
access restricted to subscribers

Related works:
Journal Article: An empirical study of credit shock transmission in a small open economy (2017)
Working Paper: An Empirical Study of Credit Shock Transmission in a Small Open Economy (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cje:issued:v:50:y:2017:i:2:p:541-570

Ordering information: This journal article can be ordered from
https://www.economic ... ionen/membership.php

Access Statistics for this article

Canadian Journal of Economics is currently edited by Zhiqi Chen

More articles in Canadian Journal of Economics from Canadian Economics Association Canadian Economics Association Prof. Werrner Antweiler, Treasurer UBC Sauder School of Business 2053 Main Mall Vancouver, BC, V6T 1Z2. Contact information at EDIRC.
Bibliographic data for series maintained by Prof. Werner Antweiler ().