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

50 Pages Posted: 9 Mar 2015 Last revised: 15 Mar 2015

See all articles by Andrei A. Levchenko

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics

Date Written: March 2015

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 short-run business cycle fluctuations in the US. 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 up to 50% of the forecast error variance of Canadian GDP and about 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.

Suggested Citation

Levchenko, Andrei A. and Pandalai-Nayar, Nitya, TFP, News, and "Sentiments:" the International Transmission of Business Cycles (March 2015). NBER Working Paper No. w21010, Available at SSRN: https://ssrn.com/abstract=2575495

Andrei A. Levchenko (Contact Author)

University of Michigan - Department of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Nitya Pandalai-Nayar

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

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