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International information flows, sentiments and cross-country business cycle fluctuations

Michal Brzoza-Brzezina, Jacek Kotłowski () and Grzegorz Wesołowski

No 2020-047, Working Papers from Warsaw School of Economics, Collegium of Economic Analysis

Abstract: Business cycles are strongly correlated between countries. One possible explanation (beyond traditional economic linkages like trade or finance) is that consumer or business sentiments spread over boarders and a ect cyclical uctuations in various countries. We first lend empirical support to this concept by showing that sentiments travel between countries at a speed much higher than can be explained by traditional linkages. Then we construct a two-economy new Keynesian model where noisy international information can generate cyclical fluctuations (comovement of GDP, consumption, investment and in ation) in both countries. Estimation with US and Canadian data reveals a significant role of international noise shocks in generating common fluctuations - they explain between 15-30% of consumption variance in the US and Canada and raise the correlation between these variables by up to unity in periods of sentiment breakdowns. We also show that our estimated noise shock has a clear interpretation as a sentiment shock.

Keywords: International spillovers; animal spirits; sentiments; business cycle (search for similar items in EconPapers)
JEL-codes: C32 E32 F44 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-03
New Economics Papers: this item is included in nep-bec, nep-dge, nep-ifn and nep-mac
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Journal Article: International information flows, sentiments, and cross‐country business cycle fluctuations (2022) Downloads
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