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Real Implications of Financial Linkages:The Case of Canada and the United States

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  • Vladimir Klyuev

    (International Monetary Fund)

Abstract

This paper investigates 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 autoregression establishes that a tightening in U.S. financial conditions has significant implications for real activity in Canada. For example, a one percentage point increase in the 3-month T-bill rate 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. The direct financial channel appears dominant in the short term.

Suggested Citation

  • Vladimir Klyuev, 2010. "Real Implications of Financial Linkages:The Case of Canada and the United States," 2010 Meeting Papers 1199, Society for Economic Dynamics.
    • Handle: RePEc:red:sed010:1199
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Mr. Tamim Bayoumi & Mr. Andrew J Swiston, 2008. "Spillovers Across NAFTA," IMF Working Papers 2008/003, International Monetary Fund.
    3. 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.
    4. 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.
    5. 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.
    6. 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.
    7. 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.

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