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

Author

Listed:
  • Michał Brzoza‐Brzezina
  • Jacek Kotłowski
  • Grzegorz Wesołowski
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 borders and affect cyclical fluctuations in various countries. We first lend empirical support to this concept by showing that sentiments travel fast between countries, most probably directly via information flows. Then we embed this idea into a structural two‐economy new Keynesian framework where noisy information available internationally can generate cyclical fluctuations (comovement of GDP, consumption, investments, and inflation) in both countries. Estimation with US and Canadian data reveals a significant role of US noise shocks in generating common fluctuations. They explain 20%–40% 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 can be interpreted as a sentiment shock.

Suggested Citation

  • Michał Brzoza‐Brzezina & Jacek Kotłowski & Grzegorz Wesołowski, 2022. "International information flows, sentiments, and cross‐country business cycle fluctuations," Review of International Economics, Wiley Blackwell, vol. 30(4), pages 1110-1147, September.
    • Handle: RePEc:bla:reviec:v:30:y:2022:i:4:p:1110-1147
    DOI: 10.1111/roie.12597
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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