Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?
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NBER Working Paper No. 14547
Issued in December 2008
NBER Program(s): EFG
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.
Published: Justiniano, Alejandro & Preston, Bruce, 2010.
"Can structural small open-economy models account for the influence of foreign disturbances?,"
Journal of International Economics,
Elsevier, vol. 81(1), pages 61-74, May.
This paper is available as PDF (276 K) or via email.
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