We set up a standard small open economy business cycle model driven by government spending shocks, neutral productivity (TFP) shocks, and investment-specific shocks. The model is calibrated to quarterly Canadian data and its predicted moments and sample paths are compared with their Canadian...

We show that recent explanations of the consumption-real exchange rate anomaly that rely on goods and financial market frictions are not robust to introducing just one additional international asset. When portfolios are selected optimally, international trade in two nominal bonds implies a...

From 1960 to 2009, the U.S. current account balance has tended to decline during expansions and improve in recessions. We argue that shocks to the trend growth rate of productivity can help explain the countercyclical U.S. current account. Our framework is a twocountry, twogood business cycle...

It is well known that real business cycle small open economy (SOE) models rely on Greenwood, Hercowitz, and Huffman (1988) preferences to match the countercyclical trade balance observed in open economies, as well as other second moments, while standard preferences à la King, Plosser, and...

In this paper the validity of the monetary exchange rate model in the long run for the Canadian-U.S. dollar exchange rate is examined. The primary test employed is the Johansen (1991) and Johansen and Juselius (1990) cointegration technique. The effects of dummy variables and lag specification...

dynamic optimizing model of money demand and currency substitution to the case in which the individual has restricted or no access to foreign currency denominated bonds. In this case currency substitution decisions and asset substitution decisions are not separable. The results obtained suggest...

We use a detailed database to investigate exchange-rate pass-through at the product level for a large number of countries. The empirical analysis suggests that pricing behaviours are dichotomous, with complete pass-through in around 25% of sectors and significant pricing-to-market in the...

We examine the current account effect of a terms-of-trade deterioration for a small country model, incorporating weakly non-separable preferences à la Shi (1994) under endogenous time preference. This enables us to emphasize a welfare change as an important determinant of the current account....

In this paper a two-country overlapping generations model is presented in which the roles of financial factors in the international monetary transmission mechanism are studied and whether and how the two types of credit market imperfections, limited participation, and costly state verification...

Intertemporal models of the current account generally assume that global shocks do not affect the current account. We use this assumption to identify global and country-specific shocks in a bivariate VAR of output and the current account. Cross-country evidence from the G7 economies suggests...