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Transmission of business cycle shocks between the US and the euro area

We analyze the transmission of structural shocks between the US and the euro area within a two-country VAR framework. For that purpose, we simultaneously identify cost-push, demand and monetary policy shocks for both countries using sign restrictions. Our results show that domestic shocks explain the largest share of the forecast error variances for GDP, consumer prices and the interest rate in both countries in the short run, whilst spillovers from the other country and global factors gain importance in the medium run. The strength of the shock transmission between the two countries is quite symmetric. Our approach to the identification of structural shocks allows us to construct confidence bands that account both for estimation and identification uncertainty. We find impulse responses to domestic shocks to be significant while spillovers across countries are insignificant.

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Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 145.

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Length: 29
Date of creation: 21 Jul 2008
Date of revision:
Handle: RePEc:onb:oenbwp:145
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  1. D. Furceri & G. Karras, 2008. "Business-cycle synchronization in the EMU," Applied Economics, Taylor & Francis Journals, vol. 40(12), pages 1491-1501.
  2. Fabio Canova & Gianni de Nicoló, 1999. "On the sources of business cycles in the G-7," Economics Working Papers 459, Department of Economics and Business, Universitat Pompeu Fabra, revised Mar 2000.
  3. James H. Stock & Mark W. Watson, 2003. "Understanding Changes in International Business Cycle Dynamics," NBER Working Papers 9859, National Bureau of Economic Research, Inc.
  4. Stephane Dees & Filippo di Mauro & M. Hashem Pesaran & L. Vanessa Smith, 2006. "Exploring the International Linkages of the Euro Area: a Global VAR Analysis," Computing in Economics and Finance 2006 47, Society for Computational Economics.
  5. Charles L. Evans & David A. Marshall, 1997. "Monetary policy and the term structure of nominal interest rates: evidence and theory," Working Paper Series, Macroeconomic Issues WP-97-10, Federal Reserve Bank of Chicago.
  6. Fabio Canova & Matteo Ciccarelli & Eva Ortega, 2003. "Similarities and convergence in G-7 cycles," Economics Working Papers 924, Department of Economics and Business, Universitat Pompeu Fabra, revised Aug 2004.
  7. Ana Beatriz Galv�o & Michael Artis & Massimiliano Marcellino, 2007. "The transmission mechanism in a changing world," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 39-61.
  8. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  9. Dées, Stéphane & Vansteenkiste, Isabel, 2007. "The transmission of US cyclical developments to the rest of the world," Working Paper Series 0798, European Central Bank.
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  11. James G. MacKinnon, 2002. "Bootstrap inference in econometrics," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 615-645, November.
  12. Imbs, Jean, 2006. "The real effects of financial integration," Journal of International Economics, Elsevier, vol. 68(2), pages 296-324, March.
  13. Benkwitz, Alexander & L tkepohl, Helmut & Wolters, J rgen, 2001. "Comparison Of Bootstrap Confidence Intervals For Impulse Responses Of German Monetary Systems," Macroeconomic Dynamics, Cambridge University Press, vol. 5(01), pages 81-100, February.
  14. Gert Peersman, 2005. "What caused the early millennium slowdown? Evidence based on vector autoregressions," Bank of England working papers 272, Bank of England.
  15. Paul Gaggl & Serguei Kaniovski & Klaus Prettner & Thomas Url, 2009. "The short and long-run interdependencies between the Eurozone and the USA," Empirica, Springer, vol. 36(2), pages 209-227, May.
  16. Jean Imbs, 2003. "Trade, Finance, Specialization, and Synchronization," IMF Working Papers 03/81, International Monetary Fund.
  17. Gert Peersman, 2007. "The Relative Importance of Symmetric and Asymmetric Shocks: the Case of United Kingdom and Euro Area," Working Papers 136, Oesterreichische Nationalbank (Austrian Central Bank).
  18. Ciccarelli, Matteo & Mojon, Benoît, 2005. "Global inflation," Working Paper Series 0537, European Central Bank.
  19. Kwark, Noh-Sun, 1999. "Sources of international business fluctuations: Country-specific shocks or worldwide shocks?," Journal of International Economics, Elsevier, vol. 48(2), pages 367-385, August.
  20. Centoni, Marco & Cubadda, Gianluca & Hecq, Alain, 2006. "Measuring the Sources of Cyclical Fluctuations in the G7 Economies," Economics & Statistics Discussion Papers esdp06028, University of Molise, Dept. EGSeI.
  21. Fabio Canova, 2003. "The transmission of US shocks to Latin America," Economics Working Papers 925, Department of Economics and Business, Universitat Pompeu Fabra, revised Jun 2004.
  22. Haroon Mumtaz & Paolo Surico, 2012. "Evolving International Inflation Dynamics: World And Country-Specific Factors," Journal of the European Economic Association, European Economic Association, vol. 10(4), pages 716-734, 08.
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