Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada

84 Pages Posted: 20 Apr 2020 Last revised: 10 Nov 2021

See all articles by Jongrim Ha

Jongrim Ha

World Bank

Inhwan So

Bank of Korea; Bank of Korea - Economic Research Institute

Date Written: March 25, 2020


We investigate the monetary policy transmission in a representative small open economy–Canada–over the 2000-2017 period. By using a novel set of external instruments, 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 operates through interest rate, foreign exchange, and credit channels in Canada. The results further suggest that US monetary policy shocks also have sizeable effects on financial conditions in Canada, in line with the credit and risk-taking channels of international monetary spillovers. That said, the US monetary spillovers into Canadian macroeconomic variables could be offset by the fluctuations in exchange rates and net exports in line with the Trilemma hypothesis. 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

Suggested Citation

Ha, Jongrim and So, Inhwan, Which Monetary Shocks Matter in Small Open Economies? Evidence from Canada (March 25, 2020). Available at SSRN: https://ssrn.com/abstract=3560692 or http://dx.doi.org/10.2139/ssrn.3560692

Jongrim Ha (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Inhwan So

Bank of Korea ( email )

Korea, Republic of (South Korea)

HOME PAGE: http://https://sites.google.com/view/inhwanso

Bank of Korea - Economic Research Institute ( email )

110, 3-Ga, Namdaemunno, Jung-Gu
Seoul 100-794
Korea, Republic of (South Korea)

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