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

Michal Brzoza-Brzezina, Jacek Kotłowski and Grzegorz Wesołowski

No 2020-047, KAE 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 businesssentiments spread over boarders and affect cyclical fluctuations in various countries. Wefirst lend empirical support to this concept by showing that sentiments travel betweencountries at a speed much higher than can be explained by traditional linkages. Thenwe construct a two-economy new Keynesian model where noisy international informationcan generate cyclical fluctuations (comovement of GDP, consumption, investmentand inflation) in both countries. Estimation with US and Canadian data reveals asignificant role of international noise shocks in generating common fluctuations - theyexplain between 15-30% of consumption variance in the US and Canada and raise thecorrelation 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 sentimentshock.

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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https://hdl.handle.net/20.500.12182/1099 (application/pdf)

Related works:
Journal Article: International information flows, sentiments, and cross‐country business cycle fluctuations (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:sgh:kaewps:2020047

DOI: 10.33119/kaewps2020047

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