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International information flows, sentiments and cross-country business cycle fluctuations

Author

Listed:
  • Michał Brzoza-Brzezina
  • Jacek Kotłowski
  • Grzegorz Wesołowski

Abstract

Business cycles are strongly correlated between countries. One possible explanation(beyond traditional economic linkages like trade or finance) is that consumer or businesssentiments spread over boarders and affect cyclical fluctuations in various countries. Wefirst lend empirical support to this concept by showing that sentiments travel betweencountries at a speed much higher than can be explained by traditional linkages. Thenwe construct a two-economy new Keynesian model where noisy international informationcan generate cyclical fluctuations (comovement of GDP, consumption, investmentand inflation) in both countries. Estimation with US and Canadian data reveals asignificant role of international noise shocks in generating common fluctuations - theyexplain between 15-30% of consumption variance in the US and Canada and raise thecorrelation between these variables by up to unity in periods of sentiment breakdowns.We also show that our estimated noise shock has a clear interpretation as a sentimentshock.

Suggested Citation

  • Michał Brzoza-Brzezina & Jacek Kotłowski & Grzegorz Wesołowski, 2020. "International information flows, sentiments and cross-country business cycle fluctuations," KAE Working Papers 2020-047, Warsaw School of Economics, Collegium of Economic Analysis.
    • Handle: RePEc:sgh:kaewps:2020047
    DOI: 10.33119/kaewps2020047
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    File URL: https://hdl.handle.net/20.500.12182/1099
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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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