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

Author

Listed:
  • Nitya Pandalai Nayar

    (Princeton University and UT Austin)

  • Andrei Levchenko

    (University of Michigan)

Abstract
We propose a novel identification scheme for a non-technology business cycle shock, that we label “sentiment.” 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 “sentiment” – 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 US short-run business cycle fluctuations. 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 over 40% of the forecast error variance of Canadian GDP and over 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. We provide a simple theoretical framework to illustrate how US sentiment shocks can transmit to Canada.

Suggested Citation

  • Nitya Pandalai Nayar & Andrei Levchenko, 2017. "TFP, News and "Sentiments:" The International Transmission of Business Cycles," 2017 Meeting Papers 1076, Society for Economic Dynamics.
    • Handle: RePEc:red:sed017:1076
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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