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Money, Output, and Real Business Cycles in a Small Open Economy

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  • Shaghil Ahmed
  • Radha Murthy

Abstract

This paper examines some key propositions of real business cycle theory using a small open-economy framework and a structural vector autoregressive methodology. Identification is achieved by long-run restrictions. The main results from the Canadian economy are that domestic supply shocks are important in explaining short-run fluctuations in output, while real interest rate and terms-of-trade changes are not; an important source of the money-output correlation is output shocks affecting inside money in the short run; and the presence of a causal influence of high-powered money or demand deposits on output is not strongly supported by the data. This paper examines some key propositions of real business cycle theory using a small open-economy framework and a structural VAR methodology. Identification is achieved by long-run restrictions. The main results from the Canadian economy are (i) domestic supply shocks are important in explaining short-run fluctuations in output, while real interest rate and terms of trade changes are not; (ii) an important source of the money-output correlation is output shocks affecting inside money in the short run; and (iii) the presence of a causal influence of high-powered money or demand deposits on output is not strongly supported by the data.

Suggested Citation

  • Shaghil Ahmed & Radha Murthy, 1994. "Money, Output, and Real Business Cycles in a Small Open Economy," Canadian Journal of Economics, Canadian Economics Association, vol. 27(4), pages 982-993, November.
    • Handle: RePEc:cje:issued:v:27:y:1994:i:4:p:982-93
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    Cited by:

    1. Le, Ha, 2014. "Dynamics of Business Cycles in Vietnam: A comparison with Indonesia and Philippines," MPRA Paper 57010, University Library of Munich, Germany, revised 01 Jul 2014.
    2. Paul Castillo Bardález & Jorge Salas, 2010. "Los términos de intercambio como impulsores de fluctuaciones económicas en economías en desarrollo: estudio empírico," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2010, July-Dece.
    3. Yung‐Hsiang Ying & Yoonbai Kim, 2001. "An Empirical Analysis on Capital Flows: The Case of Korea and Mexico," Southern Economic Journal, John Wiley & Sons, vol. 67(4), pages 954-968, April.
    4. Le Thanh Ha, 2015. "Dynamics of Business Cycles in Vietnam a Comparison with Indonesia and Philippines," Asian Journal of Economics and Empirical Research, Asian Online Journal Publishing Group, vol. 2(1), pages 23-38.
    5. P N Snowden & M A Salisu & N Taher, 2000. "Oiling the wheels: credit and monetary neutrality in Saudi Arabia," Working Papers 539748, Lancaster University Management School, Economics Department.
    6. Junior A. Ojeda Cunya & Gabriel Rodríguez, 2022. "Time-Varying Effects of External Shocks on Macroeconomic Fluctuations in Peru: An Empirical Application using TVP-VAR- SV Models," Documentos de Trabajo / Working Papers 2022-507, Departamento de Economía - Pontificia Universidad Católica del Perú.
    7. Rodríguez, Gabriel & Vassallo, Renato & Castillo B., Paul, 2023. "Effects of external shocks on macroeconomic fluctuations in Pacific Alliance countries," Economic Modelling, Elsevier, vol. 124(C).
    8. Wilson, Matthew S., 2020. "A real business cycle model with money as a sunspot variable," Journal of Economics and Business, Elsevier, vol. 109(C).
    9. Paul Castillo Bardález & Jorge Salas, 2010. "The Terms of Trade as Drivers of Economic Fluctuations in Developing Economies: An Empirical Study," Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez", Centro de Estudios Monetarios Latinoamericanos, CEMLA, number prg2010eng, July-Dece.
    10. Gabriel Rodríguez & Renato Vassallo, 2022. "Time Evolution of External Shocks on Macroeconomic Fluctuations in Pacific Alliance Countries: Empirical Application using TVP-VAR-SV Models," Documentos de Trabajo / Working Papers 2022-508, Departamento de Economía - Pontificia Universidad Católica del Perú.
    11. Thomas Lubik & Wing Teo, 2005. "Do World Shocks Drive Domestic Business Cycles? Some Evidence from Structural Estimation," Economics Working Paper Archive 522, The Johns Hopkins University,Department of Economics.
    12. Chang, Koying & Filer, Larry & Ying, Yung-Hsiang, 2002. "A structural decomposition of business cycles in Taiwan," China Economic Review, Elsevier, vol. 13(1), pages 53-64.
    13. Thomas Lubik & Wing Leong Teo, 2005. "Do Terms of Trade Shocks Drive Business Cycles? Some Evidence from Structural Estimation," Computing in Economics and Finance 2005 377, Society for Computational Economics.
    14. Gabriel Rodríguez & Pierina Villanueva Vega & Paul Castillo Bardalez, 2018. "Driving economic fluctuations in Peru: the role of the terms of trade," Empirical Economics, Springer, vol. 55(3), pages 1089-1119, November.

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