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The impact of global fiscal stimulus is good for Canada | Bank of Canada

Canada has been receiving kudos for a job well done throughout the crisis of the lest 2 years.  This analysis from Bank of Canada has a telling paragraph (highlighted) that suggests there are good classic economic reasons for Canada being where it is, and over-confidence would be a bad idea.

The Power of Many:  Assessing the impact of Global Fiscal Stimulus | Bank of Canada

Table 4 shows that, on a regional basis, the United States, as a large and relatively less open region,
benefits the least from a global stimulus. Moreover, the impact of different measures depends on its
trade patterns. The United States is a net exporter of investment goods and commodities other than oil, but a net importer of consumption goods and oil. The United States therefore benefits more from a global stimulus when global demand is slanted towards its comparative advantage in trade (e.g.,
investment goods). Japan also has a relatively closed economy, but its trade patterns are somewhat
different: it is a large net exporter of consumption and investment goods, and an importer of oil and
commodity goods.

In contrast, Canada is a small open economy and a net importer of investment and consumption goods, but a net exporter of oil and commodities. As such, it profits greatly from the global stimulus (Table 4), the multipliers being twice as large as in the case of an isolated stimulus, owing in part to a substantial improvement in its terms of trade derived from the increase in oil and commodity prices. For similar reasons, the commodity-exporting region also benefits from a global stimulus.

Emerging Asia is highly open to trade, a net importer of oil and commodities, and a large net exporter of consumption goods (Table 4). Thus, it experiences contradictory forces to its terms of trade under a global stimulus. Moreover, the presence of a large contingent of non-Ricardian agents results in almost no change in private consumption and investment under a fiscal stimulus, either local or global. The remaining countries benefit less from a global stimulus, owing to the large size of this region (39 per cent of global GDP).

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Written by Colin Henderson

January 27, 2010 at 18:32

Posted in Canada, economy

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