News-Driven International Business Cycles: Effects of the US News Shock on the Canadian Economy
This paper studies the international transmission effects of the news about the Total Factor Productivity (TFP) of the US to the Canadian economy. First, using the Vector Error Correction Model (VECM), the impulse responses of Canadian macroeconomic variables to the US news shock are estimated. Next, I develop and estimate a two-country RBC model with the preference introduced by Jaimovich and Rebelo (2008) and investment adjustment cost to generate booms in Canadian variables in response to news about future US TFP. I find that international macroeconomic comovements between the US and Canada can be generated by the news about future TFP in the US. Unlike previous studies, I show that the response of Canadian TFP to the US news shock is important in order to generate the boom observed in empirical analysis. Estimated value of the preference parameter indicates that getting rid of the wealth effect on hours worked is important. I also show that low elasticity of substitution between domestically and foreign produced intermediate goods can also help explaining the domestic boom created by the news shock, which highlights the importance of analyzing an open economy.
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- Martial Dupaigne & Franck Portier & Paul Beaudry, 2007. "The International Propagation of News Shocks," 2007 Meeting Papers 251, Society for Economic Dynamics.
- Alastair Hall & Atsushi Inoue & James M. Nason & Barbara Rossi, 2007.
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FRB Atlanta Working Paper No.
2007-10, Federal Reserve Bank of Atlanta.
- Hall, Alastair R. & Inoue, Atsushi & Nason, James M. & Rossi, Barbara, 2012. "Information criteria for impulse response function matching estimation of DSGE models," Journal of Econometrics, Elsevier, vol. 170(2), pages 499-518.
- Hall, Alastair & Inoue, Atsushi & Nason M, James & Rossi, Barbara, 2007. "Information Criteria for Impulse Response Function Matching Estimation of DSGE Models," Working Papers 07-04, Duke University, Department of Economics.
- Alastair R. Hall & Atsushi Inoue & James M Nason & Barbara Rossi, 2009. "Information Criteria for Impulse Response Function Matching Estimation of DSGE Models," Centre for Growth and Business Cycle Research Discussion Paper Series 127, Economics, The Univeristy of Manchester.
- Alastair Hall & Atsushi & James M Nason & Barbara Rossi, 2009. "Information Criteria For Impulse Response Function Matching Estimation Of Dsge Models," Working Papers 09-09, Duke University, Department of Economics.
- Alastair Hall & Atsushi Inoue & James M. Nason & Barbara Rossi, 2010. "Information Criteria for Impulse Response Function Matching Estimation of DSGE Models," Working Papers 10-28, Duke University, Department of Economics.
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