Volatility shocks in markets and policies: What matters for a small open economy like Canada?

Jamie Cross, Timothy Kam and Aubrey Poon

Economic Modelling, 2025, vol. 151, issue C

Abstract: We structurally estimate how much stochastic-volatility, relative to first-moment shocks, account for policy, demand or supply fluctuations in Canada. The historical Canadian business cycle is largely due to domestic technology and policy shocks. Time-varying volatilities dominate during times of turmoil and policy-environment changes. Our model-based shock-volatility accounting attributes the early 1980s crisis to international, cost-push, and monetary-policy shock volatilities; the adoption of inflation targeting in the early 1990s to monetary-policy uncertainty; the recessions around the early 1980s and 1990s to investment volatility; and income-tax and capital-gains tax reforms involve relatively large tax-policy uncertainty.

Keywords: Volatility shocks; Stochastic volatility; Small open economy; Internal vs. External (search for similar items in EconPapers)
JEL-codes: D52 E52 E62 F41 F44 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325001191

DOI: 10.1016/j.econmod.2025.107124

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