TFP, News, and 'Sentiments': The International Transmission of Business Cycles

Andrei Levchenko and Nitya Pandalai-Nayar

No 640, Working Papers from Research Seminar in International Economics, University of Michigan

Abstract: We propose a novel identification scheme for a non-technology business cycle shock, that we label Òsentiment.Ó This is a shock orthogonal to identified surprise and news TFP shocks that maximizes the short-run forecast error variance of an expectational variable, alternatively a GDP forecast or a consumer confidence index. We then estimate the international transmission of three identified shocks -- surprise TFP, news of future TFP, and ÒsentimentÓ -- from the US to Canada. The US sentiment shock produces a business cycle in the US, with output, hours, and consumption rising following a positive shock, and accounts for the bulk of short-run business cycle fluctuations in the US. The sentiment shock also has a significant impact on Canadian macro aggregates. In the short run, it is more important than either the surprise or the news TFP shocks in generating business cycle comovement between the US and Canada, accounting for up to 50% of the forecast error variance of Canadian GDP and about one-third of Canadian hours, imports, and exports. The news shock is responsible for some comovement at 5-10 years, and surprise TFP innovations do not generate synchronization.

Keywords: Sentiments; Demand Shocks; News Shocks; International Business Cycles (search for similar items in EconPapers)
JEL-codes: E32 F41 F44 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2015-02
New Economics Papers: this item is included in nep-mac, nep-mfd and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r640.pdf

Related works:
Journal Article: Tfp, News, and “Sentiments”: the International Transmission of Business Cycles (2020)
Working Paper: TFP, News and "Sentiments:" The International Transmission of Business Cycles (2017)
Working Paper: TFP, News, and "Sentiments:" The International Transmission of Business Cycles (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:mie:wpaper:640

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