Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada
Posted: 20 Apr 2020
Date Written: March 25, 2020
W e investigate the monetary policy transmission in a representative small open economy Canada over 2000 2017. By using a novel set of external instruments for monetary policy shocks 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 operate s through interest rate, foreign and credit channels in Canada. However, the results also find that US monetary policy shocks can have more sizeable and persistent effects on financial and credit conditions in Canada than domestic shocks, supporting the international credit and risk taking channels of monetary spillovers. These results imply that timely and effective monetary policy implementations by central banks have become increasingly difficult, although not impossible in small open economies Finally, our results are robust to various types of instrumental variables on monetary policy shocks.
Keywords: monetary policy transmission, external instrument identification, structural vector autoregressive model, open economies
JEL Classification: E44, E52
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