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Real Implications of Financial Linkages Between Canada and the United States

Author/Editor: Klyuev, Vladimir
Authorized for Distribution: January 1, 2008
Electronic Access: Free Full Text (PDF file size is 981KB)
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Disclaimer: This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.

Summary: 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.
 
Series: Working Paper No. 08/23
Subject(s): Trade | Canada | United States | Economic conditions | Capital markets
Author's keyword(s): Trade linkages | Financial linkages | SVAR
 
English  
    Published:   January 1, 2008        
            Format:   Paper
    Stock No:   WPIEA2008023   Pages:   52
    Price:   US$18.00
       
     
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