Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada

Jongrim Ha and Inhwan So

International Journal of Central Banking, 2023, vol. 19, issue 2, 389-472

Abstract: We investigate the monetary policy transmission in a representative small open economy—Canada—over the 2000–17 period. By using a novel set of external instruments, we identify the impacts of domestic (Canada) and foreign (United States) monetary shocks on financial and macroeconomic variables in Canada in a unified structural VAR framework. Our results first confirm that domestic monetary policy transmission operates through interest rate, foreign exchange, and credit channels in Canada. The results further suggest that U.S. monetary policy shocks also have sizable effects on financial conditions in Canada, in line with the credit and risk-taking channels of international monetary spillovers. That said, the U.S. monetary spillovers into Canadian macroeconomic variables could be offset by the fluctuations in exchange rates and net exports in line with the trilemma hypothesis. Finally, our results are robust to various types of instrumental variables on monetary policy shocks.

JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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