Investment‐specific shocks and external balances in a small open economy model

Abstract. We set up a standard small open economy business cycle model driven by government spending shocks, neutral productivity (TFP) shocks, and investment‐specific shocks. The model is calibrated to quarterly Canadian data and its predicted moments and sample paths are compared with their Canadian counterparts. We find that the model captures the dynamics in investment and in the trade balance better than special cases of the model where …