Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?

Alejandro Justiniano and Bruce Preston

No 479, 2006 Meeting Papers from Society for Economic Dynamics

Abstract: This paper evaluates whether an estimated, structural, small open economy model of the Canadian economy can account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The analysis shows that the benchmark model --- and a number of variants which include a range of market imperfections --- imply cross-equation restrictions that are too stringent when confronted with the data, yielding implausible parameter estimates. While appropriate choice of ad hoc disturbances can relax these cross-equation restrictions and therefore capture certain properties of the data --- for instance, the volatility and persistence of the real exchange rate --- and yield plausible parameter estimates, this success is qualified by the model's inability to account for the transmission of foreign disturbances to the domestic economy: less than one percent of the variance of output is explained by foreign shocks

Keywords: Open Economy; Transmission; Business Cycles (search for similar items in EconPapers)
JEL-codes: F41 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-cba
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Citations: View citations in EconPapers (39)

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Related works:
Journal Article: Can structural small open-economy models account for the influence of foreign disturbances? (2010)
Working Paper: Can structural small open economy models account for the influence of foreign disturbances? (2009)
Working Paper: Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances? (2008)
Working Paper: CAN STRUCTURAL SMALL OPEN ECONOMY MODELS ACCOUNT FOR THE INFLUENCE OF FOREIGN DISTURBANCES? (2006)
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