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

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  • Corsetti, Giancarlo
  • Dedola, Luca
  • Leduc, Sylvain

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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 7003.

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Date of creation: Oct 2008
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Handle: RePEc:cpr:ceprdp:7003

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

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Citations

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Cited by:
  1. Giancarlo Corsetti & Luca Dedola & Francesca Viani, 2012. "Traded and nontraded goods prices, and international risk sharing: an empirical investigation," Banco de Espa�a Working Papers 1242, Banco de Espa�a.
  2. Michael B. Devereux & Gregor W. Smith & James Yetman, 2009. "Consumption and Real Exchange Rates in Professional Forecasts," Working Papers 1195, Queen's University, Department of Economics.
  3. Sá, F. & Wieladek, T., 2011. "Monetary Policy, Capital Inflows, and the Housing Boom," Cambridge Working Papers in Economics 1141, Faculty of Economics, University of Cambridge.
  4. Enders, Zeno & Müller, Gernot & Scholl, Almuth, 2010. "How do Fiscal and Technology Shocks affect Real Exchange Rates? New Evidence for the United States," CEPR Discussion Papers 7732, C.E.P.R. Discussion Papers.
  5. Engel, Charles & Wang, Jian, 2011. "International trade in durable goods: Understanding volatility, cyclicality, and elasticities," Journal of International Economics, Elsevier, vol. 83(1), pages 37-52, January.
  6. Guerron-Quintana, Pablo A., 2013. "Common and idiosyncratic disturbances in developed small open economies," Journal of International Economics, Elsevier, vol. 90(1), pages 33-49.
  7. Pablo A. Guerron-Quintana, 2012. "Common and idiosyncratic disturbances in developed small open economies," Working Papers 12-3, Federal Reserve Bank of Philadelphia.

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