Business Cycle Transmission from the Us to Germany - a Structural Factor Approach

Abstract

This paper investigates the transmission of US macroeconomic shocks to Germany using a large-dimensional structural dynamic factor model. This framework allows us to investigate many transmission channels simultaneously, including "new" channels such as stock markets, foreign direct investment, bank lending and the confidence channel. We find that US shocks affect the US and Germany largely symmetrically. Trade seems to be the most relevant transmission channel. Monetary policy reactions to strong price movements seem to play a role as well. No clear conclusion can be drawn yet on the role of financial markets and the confidence channel. Negative domestic influences apparently more than offset positive US influences in the German economy between 1995 and 2000, but the US recession in 2001 appeared to be the main culprit in the German slump.

Keywords: International business International business cycles, international transmission channels, dynamic factor models, shock identification

JEL Classification: F02, F41, C13, C32