Sunday, February 15, 2009

Why Canadians should be praying for the US stimulus package to work

I had some free time this weekend so I ran a pessimistic scenario for US recovery through my small-scale Canadian economic model. This scenario assumes that the US recession continues to 2009-Q4 and is followed by a very weak recovery in 2010. The implications for the Canadian economy are pictured below as deviations of Real GDP from its peak in 2008-Q3.



Lets hope it works!

2 comments:

Stephen Gordon said...

Yikes...

Just so I can get a grasp of the difference: is there anything qualitatively different between the two scenarios, or is it the bad scenario the not-quite-so-bad scenario on steroids?

Shock Minus Control said...

I think its accurate to describe the scenarios as bad and bad on steroids.

The main difference is the assumption that the recession in the US extends to the end of 2009 and is followed by a very weak recovery of below potential growth. The baseline is a recovery beginning in 2009Q3 followed by a decent recovery in the US to around potential.

Its a little more ad-hoc then I'd like since I haven't endogenized the US block of the model yet, but an interesting discussion piece.