Changing Structural Factors in Canada's Cyclical Sensitivity, 1903-54

Abstract

An earlier paper examined changes in Canadian sensitivity to United States business fluctuations. The evidence suggested that this sensitivity may have declined from the ten years preceding the First World War to the twenties, and that it undoubtedly declined between the twenties, on the one hand, and the thirties and post-war period on the other. Changes in sensitivity were measured by changes in the average percentage amplitude of fluctuations in Canadian output indicators associated with given percentage fluctuations of the corresponding United States indicators. The changes in sensitivity observed in this way were very small, but the decline from the twenties to the thirties and the post-war period was statistically significant.The present paper attempts an explanation of these findings by examining changes in structural factors that can be assumed to have influenced Canada's cyclical sensitivity. Most of these factors have been frequently discussed by Canadian economists.Since exports are a major channel for the transmission of cyclical fluctuations (indeed, in the thinking of many economists they appear to be the only channel), and since United States business conditions influence, directly and indirectly, Canadian exports to all countries, the sensitivity of total Canadian exports to United States business fluctuations must be examined. Since the United Kingdom has been a major market for exports, the influence of its business fluctuations on the relation between United States and Canadian fluctuations is also relevant.