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TFP, News, and 'Sentiments': The International Transmission of Business Cycles

Listed author(s):
  • Andrei A. Levchenko

    (University of Michigan and NBER)

  • Nitya Pandalai-Nayar

    (University of Michigan)

We propose a novel identification scheme for a non-technology business cycle shock, that we label Òsentiment.Ó 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 ÒsentimentÓ -- 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.

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File URL: http://www.fordschool.umich.edu/rsie/workingpapers/Papers626-650/r640.pdf
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Paper provided by Research Seminar in International Economics, University of Michigan in its series Working Papers with number 640.

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Length: 44 pages
Date of creation: Feb 2015
Handle: RePEc:mie:wpaper:640
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