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December 1986

A VAR Analysis of Economic Interdependence: Canada, the United States, and the Rest of the World

by John Kuszczak

Through their empirical analysis, the authors find that U.S. variables are affected by international variables to a greater extent than many would think. An example in the sensitivity of domestic money demand to movements in foreign interest rates and in exchange rates. An important finding in their work is that the shift from a fixed exchange rate regime to a flexible exchange rate regime does not statistically influence the time series properties of the variables studied. This finding, along with other results reported in their article, lead the authors to state that “international economic interdependence need not preclude independent policy action by small open economies.”