Monetary policy identification for Canada And Mexico using vector autoregression analysis

Within the literature pertaining to international monetary phenomena, there is widespread reporting of puzzling behavior regarding interrelated movements of exchange rates, interest rates, price levels and other macroeconomic variables. These movements are puzzling from the perspective of the widely accepted Mundell-Flemming framework, which is most often used to guide policy in this area.; Of particular interest are small open economies and the extent to which they are influenced by either large and economically powerful neighbors or worldwide economic variables. This dissertation investigates whether Canada and Mexico display similar behavior when a floating exchange rate existed in both nations, from 1995 to present. Both nations trade predominantly with the United States and are typically assumed to be strongly influenced its economic condition.; Using Vector Auto Regression (VAR) methodology, this dissertation begins by using especially simple VARs and then increases their complexity to see if basic conclusions are strongly influenced by model selection. At one extreme in this process lies the model of Cushman and Zha, which reports for both Canada and Mexico monetary behavior consistent with the prevailing orthodox understanding.; The conclusion reached is that, given the assumptions made in the more elaborate models, results from simpler approaches, though not consistent with orthodox theory, should not yet be rejected.