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Real Implications of Financial Linkages Between Canada and the United States

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  • Mr. Vladimir Klyuev

Abstract

This paper documents the extent of financial linkages between Canada and the United States and explores the impact of changes in U.S. financial conditions on financial conditions and real economic activity in Canada. It shows that close to a quarter of financing by Canadian corporations is raised south of the border. Empirical analysis using structural vector autoregressions establishes that a tightening in U.S. financial conditions has significant implications for real activity in Canada. For example, a percentage point increase in the 3- month T-bill rate, other things being equal, leads to a decline of slightly more than one percentage point in Canada's real GDP growth after 3 quarters. That decline can be decomposed into three channels: the direct financial channel, where the slowdown is attributed to a rising cost of funds for Canadian companies raising capital in the United States; the indirect financial channel, where growth is hampered as financial conditions in Canada tighten in response to a tightening in the United States; and the trade channel, which goes through a slowing in the U.S. economy, and correspondently lower demand for Canadian exports. As would be expected from the high degree of reliance on U.S. financing, the direct financial channel proves dominant in the short term.

Suggested Citation

  • Mr. Vladimir Klyuev, 2008. "Real Implications of Financial Linkages Between Canada and the United States," IMF Working Papers 2008/023, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2008/023
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    Cited by:

    1. International Monetary Fund, 2012. "Paraguay: Selected Issues," IMF Staff Country Reports 2012/212, International Monetary Fund.
    2. P. Siklos, B. Lavender, 2014. "The Credit Cycle And The Business Cycle In Canada And The U.S.: Two Solitudes," LCERPA Working Papers wm0065, Laurier Centre for Economic Research and Policy Analysis.
    3. Mr. Tamim Bayoumi & Mr. Andrew J Swiston, 2008. "Spillovers Across NAFTA," IMF Working Papers 2008/003, International Monetary Fund.
    4. Kingsley I. Obiora, 2010. "Do countries catch cold when trading partners sneeze? Evidence from spillovers in the Baltics," Financial Theory and Practice, Institute of Public Finance, vol. 34(2), pages 143-160.
    5. Kabaca, Serdar & Tuzcuoglu, Kerem, 2024. "International transmission of quantitative easing policies: Evidence from Canada," Journal of Economic Dynamics and Control, Elsevier, vol. 162(C).
    6. International Monetary Fund, 2009. "Decoupling from the East Toward the West? Analyses of Spillovers to the Baltic Countries," IMF Working Papers 2009/125, International Monetary Fund.
    7. Kimberly Beaton & René Lalonde & Stephen Snudden, 2014. "The propagation of U.S. shocks to Canada: Understanding the role of real financial linkages," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 47(2), pages 466-493, May.
    8. Houssa, Romain & Mohimont, Jolan & Otrok, Christopher, 2023. "Commodity exports, financial frictions, and international spillovers," European Economic Review, Elsevier, vol. 158(C).
    9. Vasishtha, Garima & Maier, Philipp, 2013. "The impact of the global business cycle on small open economies: A FAVAR approach for Canada," The North American Journal of Economics and Finance, Elsevier, vol. 24(C), pages 191-207.
    10. Rupa Duttagupta & N. Barrera, 2010. "The Impact of the Global Crisis on Canada—What Do Macro-Financial Linkages Tell Us?," IMF Working Papers 2010/005, International Monetary Fund.
    11. Mohamed BELHEDI & Ines SLAMA & Amine LAHIANI, 2015. "Tranmission Of International Shocks To An Emerging Small Open-Economy: Evidence From Tunisia," Region et Developpement, Region et Developpement, LEAD, Universite du Sud - Toulon Var, vol. 42, pages 231-258.
    12. Lange, Ronald H., 2014. "The small open macroeconomy and the yield curve: A state-space representation," The North American Journal of Economics and Finance, Elsevier, vol. 29(C), pages 1-21.
    13. Jean Louis, Rosmy & Brown, Ryan & Balli, Faruk, 2011. "On the feasibility of monetary union: Does it make sense to look for shocks symmetry across countries when none of the countries constitutes an optimum currency area?," Economic Modelling, Elsevier, vol. 28(6), pages 2701-2718.
    14. Ms. Yan M Sun & Mr. Wendell A. Samuel, 2009. "ECCU Business Cycles: Impact of the U.S," IMF Working Papers 2009/071, International Monetary Fund.
    15. Louis, Rosmy J & Brown, Ryan & Balli, Faruk, 2009. "Are Mortgage Rates Bubbling Up Trouble for Canadas Metropolitan Housing Sector?," MPRA Paper 17245, University Library of Munich, Germany.
    16. Chin, Chang-Chiang & Paphakin, Warinthorn, 2021. "The daily relationship between U.S. asset prices and stock prices of American countries," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).

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