(2019) Casares Polo, Miguel; Villar Olano, Alba del; Economía; Ekonomia
We calibrate a two-country New Keynesian model with endogenous portfolio choice and valuation effects to discuss the determinants of the increase in Canadian Net Foreign Assets with the US
observed after 2012. Furthermore, we discuss the shocks that may explain the “reversed two-way”
capital flows pattern recently characterizing the Canada-US asset trading: Canada has a negative
position on bond holdings owned by US investors while a positive balance emerges on its equity
holdings from US firms. The combination of a global technology shock, the US fiscal contraction,
an adverse wage-push shock in the US and the greater monetary stimulus in the US than in Canada
(QE) provide insights to describe the recent capital flows between Canada and the US. Both the
QE and the negative wage-push shock in the US play a crucial role as explanatory factors through
substantial valuation effects.
