The International Dimension of Productivity and Demand Shocks in the US Economy

53 Pages Posted: 18 Dec 2008

See all articles by Giancarlo Corsetti

Giancarlo Corsetti

University of Cambridge; University of Rome III - Department of Economics; Centre for Economic Policy Research (CEPR)

Luca Dedola

Bank of Italy; European Central Bank (ECB)

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco

Date Written: October 2008

Abstract

This paper investigates the international dimension of productivity and demand shocks to US manufacturing. Identifying shocks with sign restrictions based on standard theory predictions we find that productivity gains in manufacturing - our measure of tradables - have substantial aggregate effects, boosting US consumption and investment, relative to the rest of the world, thus raising real imports; net exports and US net foreign assets correspondingly decrease. We also ascertain substantial repercussions through the international financial adjustment mechanism, via a rise in US shares prices and nontrivial portfolio shifts in gross US foreign assets and liabilities. At the same time these shocks appreciate the US real exchange rate and improve its terms of trade. Shocks to the demand for US manufacturing also lead to real dollar appreciation; however, they appear to have less pronounced aggregate effects, with limited impact on trade and capital accounts. Our findings provide novel evidence on key channels of the international transmission of business cycle impulses, including financial channels, linking aggregate demand, the current account, international relative prices. Namely, asymmetric wealth effects amplify rather than attenuate the consequences of US shocks to tradables on domestic aggregate spending, driving endogenous aggregate demand fluctuations across countries.

Keywords: consumption risk sharing, International transmission mechanism, sign restrictions, structural VAR, US dollar real exchange rate

JEL Classification: F31, F41, F42

Suggested Citation

Corsetti, Giancarlo and Dedola, Luca and Leduc, Sylvain, The International Dimension of Productivity and Demand Shocks in the US Economy (October 2008). CEPR Discussion Paper No. DP7003, Available at SSRN: https://ssrn.com/abstract=1311127

Giancarlo Corsetti (Contact Author)

University of Cambridge ( email )

University of Rome III - Department of Economics ( email )

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Rome, 00154
Italy
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Centre for Economic Policy Research (CEPR)

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United Kingdom

Luca Dedola

Bank of Italy ( email )

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Rome, 00184
Italy

European Central Bank (ECB) ( email )

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Frankfurt am Main, 60314
Germany

Sylvain Leduc

Federal Reserve Banks - Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

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