This paper examines whether international spillovers matter for long run neutrality. Using as small open economy Canada, and U.S. for relevant foreign economy, we run three separate VAR systems, with none, some and all crossborder effects. We compare impulse responses and variance decompositions across the systems. We conclude that, for Canada, unless international spillovers are considered, one can mistakenly find that long run neutrality does not hold.
|Publication status||Published - 1 Jan 2009|