Regional cyclical behaviour and sensitivity in Canada, 1919-1973
Creators: name: Blain, Larry
Publisher: name: University of British Columbia
Year: 2010

description: This Thesis investigates "short-run" economic cycles in Canadian regions over the period 1919-1973. There are a number of readily available monthly and quarterly time-series which represent the essential aspects of "general economic activity" in the various regions (British Columbia, the Prairies, Ontario, Quebec and the Maritimes). These data are used to describe the pattern of cyclical behaviour in Canada's regions and to analyze the regional mechanism by which United States business cycles are transmitted into Canada. Two quantitative methods are used - the "episodic" method (fashioned after the approach of the National Bureau of Economic Research) and the spectral analytic method. These areas of investigation are directed at two characteristics of Canadian development with which Canadian economists have long been concerned. The first is the persistence of regional disparities; the application in this study of the seldom-used monthly and quarterly time-series provides new insight to the short-run stability, and changes in stability over time, of Canada's regional economies. The second characteristic is that at least until World War I there has existed a very strong tendency for specific regions to play central roles as locations for the production of nationally-important export goods at different periods of time, suggesting an economic sensitivity between foreign, regional and national economies which is summarized by the staple theory of Canadian economic growth. However, since the First World War there has been for various reasons a considerable although gradual evolution in regional economic structure which may have altered the mechanism of cyclical transmission among regions. Moreover, modern treatments of fluctuations in the national economy over the period 1919-1973 suggest that in many ways Canadian cyclical behaviour is but a function of corresponding behaviour in the United States. When the postwar period is compared with the interwar period a decline can be observed in Canada's sensitivity to fluctuations in the general economic activity of the United States but this decline has remained largely unexplained because of the obvious complexity of the economic linkages between the two countries. By examining the evolution of sensitivity among Canada's heterogeneous regions much light is shed upon the question of declining Canadian sensitivity. The overall evidence from the regional time-series suggests that in a broad sense disparities in regional fluctuations are rather large. On balance, the Canadian regions adhere to a common, basic pattern in economic fluctuations in that episodes, found in the national indicators are usually found in the regional indicators and tend to have a similar average duration. However, there the similarity ends although there was a surprisingly uniform strength in the shorter "subcycle", especially in the postwar period. The ability of business cycles to explain the total variation in economic indicators is markedly different among regions - in British Columbia and Ontario the cycle is stronger than the regional average and in the Maritimes and Prairies it is weaker. Also, within the common regional-national pattern in fluctuations significant differences in timing are apparent; certain regions seem to consistently lead or lag the national economy. Indeed, there are significant differences between the cyclical behaviours of Ontario and Quebec even though the economic linkages which transmit cycles between the two regions are strong. During the interwar period Canadian regions were generally sensitive to business cycle fluctuations in the United States, although British Columbia, Ontario and Quebec were more closely attuned to the United States economy than either the Prairies or Maritimes. The varying levels of regional-USA correspondence indicate that the transmission of cycles from the United States does not occur similarly in all regions, although in each case the volatility in regional business cycles is less than that of the United States. The evidence for the interwar period suggests that the mechanism by which United States business cycles are transmitted into Canada is characterized by a tendency for Ontario to be sensitive to both the Rest-of-Canada and the United States; Ontario also appears to be the most volatile region, particularly during the 1930s. This result is consistent with the view that because Ontario is likely a net exporter of capital goods and consumer durables to the other regions then a cyclical instability in the marginal propensity to import in the other regions might stabilize these regions while at the same time destabilizing the Ontario economy. When the postwar and interwar periods are compared, several important changes are observed in the transmission mechanism. While cycles are still transmitted from the United States to the Canadian regions there is a noticeable decline in the significance of this sensitivity, with the largest reductions occurring in Quebec and B.C., and a smaller reduction occurring in Ontario. There have also been declines in regional correspondence to the Rest-of-Canada, which have been of approximately the same order of magnitude in each region. To some extent the weakened interregional correspondence may have resulted from weakened regional sensitivity to the United States but, nevertheless, the reduction in regional-USA sensitivities in the postwar period suggests a change in the regional mechanism of cyclical transmission, particularly in that Ontario is a stronger transmitter of United States fluctuations than formerly. Thus, the traditional view that economic cycles are transmitted from "staple-producing" regions to Central Canada, especially Ontario, has apparently become less appropriate since World War II.