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As the substantial share of the Canadian trade occurs with the United States,one would expect that the uctuations in US macroeconomic aggregates are rapidly transmitted to the Canadian economy. Speci cally, the transmission should occur through changes in the ow of goods and nancial assets. However, the standard general equilibrium models fail to show such a relationship. In this paper, I consider a small open-economy model taking the uctuations of US variables as given and explicitly incorporating the ows of intermediate goods and nancial assets. The simulation results show that the model can reproduce the actual data reasonably well when the trade share of intermediate goods is properly calibrated and the ow of nancial asset is absent. That is, transmission does occur through trade in goods but not through assets.
