Risk Amplification Macro Model (RAMM)
The Risk Amplification Macro Model (RAMM) is a new nonlinear two-country dynamic model that captures rare but severe adverse shocks. Tail risk arises from heightened financial stress abroad or in Canada that triggers a regime change with a negative feedback loop to the real economy. We rely on a combination of sign, zero and elasticity restrictions to identify structural shocks. The foreign block (global and US variables) impacts the domestic block (a large number of Canadian macrofinancial variables), but not vice-versa. Simulations suggest that tighter financial conditions in the United States can spill over to Canada, and a regime change in macrofinancial elasticities provides a good replication of economic downturns. The RAMM can be used to assess the financial stability implications of both domestic and foreign-originated risk scenarios.