Transmission of news shocks in a small open economy DSGE model (Q478017)

Summary: This paper estimates a small open economy DSGE model with anticipated news component in the structural shocks using quarterly data of Canada and the USA. We use Bayesian MCMC methods to investigate the contribution of news shocks to the unconditional variance of aggregate variables in the small open economy of Canada and also the transmission of such shocks from the USA. We find that news shocks from the USA have negligible role in explaining fluctuations in the aggregate variables of Canada. However, news shocks originating in Canada play an important role in explaining output and interest rate fluctuations domestically. Moreover, it contributes to about 15\% of output and 35\% of interest rates fluctuations in Canada.