Canada

• Author: Vladimir Klyuev
• Pages: 9-10

Page 9

Canada is an open economy whose trade is dominated by the United States. Kose (2004) finds that Canadian-U.S. free trade agreements have substantially increased trade and financial flows while increasing business-cycle synchronicity. Justiniano (2005), using factor analysis, finds that the U.S. cycle explains about half the variation in Canada's real GDP and industrial production. Ivaschenko and Swiston (2005), using a small monetary model, find spillovers from U.S. activity are significant but can be mitigated by a speedy monetary policy response, while U.S. monetary policy has relatively modest effects on Canada.

Canada's lack of productivity catch-up with the United States since 1995 is analyzed in Cardarelli and Kose (2004), who find that it is explained by Canada's industrial structure rather than increased trade integration with the United States. Although productivity differentials across sectors have been similar, the United States has been much more successful in shifting resources toward high-productivity industries.

Canada's impressive GDP growth over the last decade despite somewhat lackluster productivity performance is explained by a substantial rise in labor force participation, particularly among women. Tsounta (2006) finds that reforms in the Canadian tax and benefit system in the mid-1990s account for at least a third of the observed increase in female participation during 1995-2001.

Since the early 1980s, Canada, like the United States, has experienced a secular decline in the household saving rate. Faulkner-MacDonagh (2004), who estimates a long-run relationship between the saving rate and household net worth, inflation, interest rates, and government spending, finds this has reflected improvement in the fiscal balance, success in fighting inflation, and increases in households' net worth. Klyuev and Mills (2006), using an error-correction framework on saving behavior in four "Anglo-Saxon" economies, find that, in contrast to the experience in the United States, the decline in the Canadian household saving rate in recent years has not coincided with a rise in home-equity withdrawal.

Canada's large commodity sector makes the country susceptible to terms of trade shocks that spill over into its "commodity currency," which has appreciated strongly in the last four years as oil and other commodity prices have soared. Lee and Mühleisen (2004) and Bayoumi and Mühleisen (2006) argue that this appreciation has largely...