A SMALL OPEN-ECONOMY IN DEPRESSION - LESSONS FROM CANADA IN THE 1930S

This paper tests the hypothesis that idiosyncratic U.S. disturbances a nd their international propagation can account for the global Depressi on. Exploiting common stochastic trends in U.S. and Canadian interwar data, we estimate a small open economy model for Canada that decompose s output fluctuations into sources identifiable with world and country -specific disturbances. We find that the onset, depth, and duration of output collapse in both Canada and the United States are primarily at tributable to a common, permanent output shock, leaving little signifi cant role for idiosyncratic disturbances originating in either economy .