MONEY, OUTPUT, AND REAL BUSINESS CYCLES IN A SMALL OPEN-ECONOMY

This paper examines some key propositions of real business cycle theor y using a small open-economy framework and a structural VAR methodolog y. Identification is achieved by long-run restrictions. The main resul ts from the Canadian economy are (i) domestic supply shocks are import ant in explaining short-run fluctuations in output, while real interes t rate and terms of trade changes are not; (ii) an important source of the money-output correlation is output shocks affecting inside money in the short run; and (iii) the presence of a causal influence of high -powered money or demand deposits on output is not strongly supported by the data.