Bank of Canada paper warns of shock transmission multipliers
A working paper, published by the Bank of Canada in July, highlights the risks posed by financial frictions between countries, finding that this leads to a multiplier effect in the transmission of shocks through an investment channel.
The author, Wen Yao, analyses data from advanced economies over the period 1972–2008, identifying a positive relationship between the amount of cross-border investment and the correlation of output between countries. The paper suggests that this occurs due to a
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