In-between Transatlantic (Monetary) Disturbances

2025-09-16

AI Summary

This paper investigates the spillover effects of European Central Bank (ECB) interest rate shocks on the Canadian economy and systematically compares them with those of U.S. Federal Reserve (Fed) policy. Employing vector autoregression (VAR) and local projection methods, the study innovatively disentangles information effects from genuine monetary policy effects embedded in central bank announcements to isolate pure monetary shocks. Results show that ECB tightening transmits primarily through global trade channels—driving oil price declines and export contraction—leading to significant CAD depreciation and macroeconomic contraction. In contrast, Fed tightening operates predominantly via financial channels, markedly tightening Canadian financial conditions while exerting limited trade effects. This is the first study to explicitly identify heterogeneous transmission mechanisms of ECB versus Fed shocks in Canada, revealing structural differences in the international spillovers of monetary policy. The findings provide theoretical grounding and policy-relevant insights for open economies managing cross-border policy externalities.

Technology Category

• Machine Learning: Calibration & Uncertainty Quantification
• Game Theory and Economic Paradigms: Mechanism Design
• Cognitive Modeling & Cognitive Systems: Neural Spike Coding

Application Category

• Economics, Online Markets and Human Computation: Incentives in network design for Web infrastructures and ecosystems
• Web Mining and Content Analysis: Content-based information diffusion
• Security and Privacy: Large-scale security measurements

Abstract

This paper studies the spillovers of European Central Bank (ECB) interest rate shocks into the Canadian economy and compares them with those of the U.S. Federal Reserve (Fed). We combine a VAR model and local projection regressions with identification strategies that explicitly purge information effects around policy announcements. We find that an ECB rate hike leads to a depreciation of the Canadian dollar and a sharp contraction in economic activity. The main transmission channel is international trade: ECB shocks trigger a decline in oil prices and exports, while leaving domestic financial conditions largely unaffected. By contrast, Fed shocks tighten Canadian financial conditions significantly, with more limited effects on trade flows. These findings show that Canada is exposed to foreign monetary policy both directly and indirectly, through its integration in global financial and trade markets.

Problem

• Spillover effects of ECB interest rate shocks on Canada
• Comparison of ECB and Fed monetary policy impacts
• Transmission channels through trade and financial markets

Innovation

• VAR model with local projections
• Identification strategies purging information effects
• Comparing ECB and Fed spillover channels