Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/70578 
Year of Publication: 
2009
Series/Report no.: 
Working Paper No. 2009-19
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
This paper demonstrates that an estimated, structural, small open-economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence.
Document Type: 
Working Paper

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