The Impact Of The Global Business Cycle On Small Open Economies: A FAVAR Approach For Canada
Building on the growing evidence on the importance of large data sets for empirical macroeconomic modeling, the authors use a Factor-Augmented VAR (FAVAR) model with more than 260 series for 20 OECD countries to analyze how global developments affect the Canadian economy. The authors focus on several sources of shocks, including commodity prices, foreign economic activity, and foreign interest rates. The authors evaluate the impact of each shock on key Canadian macroeconomic variables to provide a comprehensive picture of the effect of international shocks on the Canadian economy. The findings indicate that Canada is primarily exposed to shocks to foreign activity and to commodity prices.