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Real Implications of Financial Linkages Between Canada and the United States, Vladimir Klyuev

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
Table Of Contents
Contents; I. Introduction; II. Financial linkages; III. Model; IV. Empirical analysis; V. Transmission of U.S. financial shocks to Canada; VI. Sensitivity analysis and extensions; VII. Conclusion; Figures; 1. Canadian corporate bonds: gross new issues; 2. Net issuance of foreign bonds by Canadian corporations; 3. Percentage of shares of Canadian companies held by U.S. residents; 4. Foreign loans to Canadian non-bank sector as percentage of bank loans to Canadian non-financial corporations; 5. Determinants of capital level; 6. Direct impact of tightening in U.S. financial conditions
Literary Form
non fiction
Description based upon print version of record
Physical Description
1 online resource (54 p.)
Specific Material Designation
Form Of Item

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