TY  - JOUR
AU  - Justiniano,Alejandro
AU  - Preston,Bruce
TI  - Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14547
PY  - 2008
Y2  - December 2008
UR  - http://www.nber.org/papers/w14547
L1  - http://www.nber.org/papers/w14547.pdf
N1  - Author contact info:
Alejandro Justiniano
Economic Research Department
Federal Reserve Bank of Chicago
230 S. LaSalle Street
Chicago, IL 60604
Tel: 312/322-5900
E-Mail: ajustiniano@frbchi.org

Bruce Preston
Department of Economics
Columbia University
420 West 118th Street
New York, NY 10027
Tel: 212/854-4092
Fax: 212/854-8059
E-Mail: bp2121@columbia.edu
AB  - This paper demonstrates that an estimated, structural, small open economy model of the Canadian economy cannot account for the substantial influence of foreign-sourced disturbances identified in numerous reduced-form studies. The benchmark model assumes uncorrelated shocks across countries and implies that U.S. shocks account for less than 3 percent of the variability observed in several Canadian series, at all forecast horizons. Accordingly, model-implied cross-correlation functions between Canada and U.S. are essentially zero. Both findings are at odds with the data. A specification that  assumes correlated cross-country shocks partially resolves this discrepancy, but still falls well short of matching reduced-form evidence.
ER  -