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Real-Financial Linkages in the Canadian Economy: An Input-Output Approach

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  • Danny Leung
  • Oana Secrieru

Abstract

The purpose of this paper is twofold. First, we provide a detailed social accounting matrix (SAM), which incorporates the income and financial flows into the standard input-output matrix, for the Canadian economy for 2004. Second, we use the SAM to assess the strength of the real-financial linkages by calculating and comparing real SAM multipliers and financial social accounting matrix (FSAM) multipliers. For FSAM multipliers, financial flows are endogenous, whereas for real SAM multipliers they are not. Our results show that taking into account financial flows increases the impact of a final demand shock on Canadian output. Financial flows also play an important role in determining the cumulative effect of an income shock or the availability of investment funds. Between 2008 and the first half of 2009, financial institutions shifted their investments towards government bonds, short-term paper, and foreign investments. This shift together with the fact that non-financial institutions were unwilling or unable to increase their financial liabilities, led to estimated declines in all GDP multipliers between 2008 and the first half of 2009 (2009H1). The main advantage of using the extended input-output impact analysis is that it provides a simple framework, with very few assumptions, which allows the assessment of the strength of real-financial linkages by means of multipliers. However, our methodology is subject to the Lucas critique, that as shocks shift prices, agents cannot adjust. Such a framework is, nevertheless, appropriate in short-term impact analysis such as ours.

Suggested Citation

  • Danny Leung & Oana Secrieru, 2011. "Real-Financial Linkages in the Canadian Economy: An Input-Output Approach," Staff Working Papers 11-14, Bank of Canada.
  • Handle: RePEc:bca:bocawp:11-14
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    References listed on IDEAS

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    1. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    2. Rispoli, Luke, 2009. "Trends in Gross Domestic Product and Self-employment of Unincorporated Enterprises in the Canadian Economy, 1987 to 2005," Insights on the Canadian Economy 2009024e, Statistics Canada, Economic Analysis Division.
    3. Geoffrey J. D. Hewings & Michael Sonis & Moss Madden & Yoshio Kimura (ed.), 1999. "Understanding and Interpreting Economic Structure," Advances in Spatial Science, Springer, number 978-3-662-03947-2.
    4. Thorbecke, Erik & Jung, Hong-Sang, 1996. "A multiplier decomposition method to analyze poverty alleviation," Journal of Development Economics, Elsevier, vol. 48(2), pages 279-300, March.
    5. Li, Jia, 2008. "The Financial Social Accounting Matrix for China, 2002, and Its Application to a Multiplier Analysis," MPRA Paper 8174, University Library of Munich, Germany.
    6. Ian Christensen & Ali Dib, 2008. "The Financial Accelerator in an Estimated New Keynesian Model," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(1), pages 155-178, January.
    7. Brian Wixted & Norihiko Yamano & Colin Webb, 2006. "Input-Output Analysis in an Increasingly Globalised World: Applications of OECD's Harmonised International Tables," OECD Science, Technology and Industry Working Papers 2006/7, OECD Publishing.
    8. Marcel Timmer & Pirkko Aulin-Ahmavaara, 2007. "New Developments in Productivity Analysis within an Input-Output Framework: an Introduction," Economic Systems Research, Taylor & Francis Journals, vol. 19(3), pages 225-227.
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    Cited by:

    1. Marwil J. Dávila-Fernández, 2019. "Manufacture Content and Financialisation: An Empirical Assessment," Department of Economics University of Siena 811, Department of Economics, University of Siena.
    2. Osman Aydogus & Cagacan Deger & Elif Tunali Caliskan & Gulcin Gurel Gunal, 2015. "Import Dependency in Turkey: an Input-Output Analysis," Working Papers 1502, Ege University, Department of Economics.
    3. Aydoğuş, Osman & Deger, Cagacan & Tunalı Çalışkan, Elif & Gürel Günal, Gülçin, 2015. "Regional Input-Output Analysis of A Mega-Event: Possible Impact of EXPO on Izmir Economy," MPRA Paper 65547, University Library of Munich, Germany.
    4. Irfan Ahmed & Claudio Socci & Francesca Severini & Qaiser Rafique Yasser & Rosita Pretaroli, 2018. "The structures of production, final demand and agricultural output: a Macro Multipliers analysis of the Nigerian economy," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 35(3), pages 691-739, December.
    5. A. O. Baranov & A. V. Goreev, 2022. "Analysis of the Multiplier Effects Produced by Investment in a Dynamic Input–Output Model," Studies on Russian Economic Development, Springer, vol. 33(6), pages 687-696, December.
    6. Hang (Robin) Luo & Abu Reza Mohammad Islam & Rui Wang, 2021. "Financing Constraints and Investment Efficiency in Canadian Real Estate and Construction Firms: A Stochastic Frontier Analysis," SAGE Open, , vol. 11(3), pages 21582440211, July.
    7. Luis Enrique Pedauga & Aray, Henry & Velazquez, Agustín, 2016. "A Financial Social Accounting Matrix for the Spanish Economy," EcoMod2016 9490, EcoMod.
    8. Marwil J. Dávila-Fernández & Lionello F. Punzo, 2018. "A Multi-Sectoral Approach to Financialisation," Department of Economics University of Siena 794, Department of Economics, University of Siena.

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    More about this item

    Keywords

    Economic models; Financial markets; Sectoral balance sheet;
    All these keywords.

    JEL classification:

    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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