Sources and Propagation Mechanims of Foreign Disturbances in Small Open Economies: A Dynamic Factor Analysis

Alejandro Justiniano

No 148, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: This paper uses dynamic factor analysis to investigate the sources of foreign shocks and the propagation mechanism of these disturbances into two small open economies, Australia and Canada. Panels including a variety of foreign and domestic series for each country are used to estimate the factors. The specification of dynamics permits the computation of impulse responses which are used to suggest a structural interpretation of the factors. A small open economy model of the New Open Economy Macroeconomics is calibrated to contrast theoretical and empirical impulse responses. The results reveal that innovations in highly integrated equity markets are associated with comovements in investment which are crucial in explaining the cofluctuations in economic activity across countries. Therefore, the omission of traded capital goods in small open economy models represents an important shortcoming of theoretical frameworks in the literature

Keywords: Open Economy Macroeconomics Factor Analysis; Gibbs Sampling (search for similar items in EconPapers)
JEL-codes: C32 F41 (search for similar items in EconPapers)
Date: 2004-08-11
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecm:latm04:148

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