The Transmission of Shocks between Europe, Japan and the United States

This paper identifies the types of shocks that affect the economies of Europe, the U.S. and Japan and the transmission path of those shocks between the countries. Identification of the origin and nature of the shocks and the transmission of those shocks between countries leads to a better understanding of international business cycle dynamics and international policy cooperation. The identification of shocks is based on the cointegrated VAR methodology. The categorization and interpretation of the shocks is based on theoretical studies on international business cycles and international policy coordination. I find that country-specific U.S permanent shocks transmit to Europe and Japan. Those shocks are approximately symmetric and, when positive, have a locomotive effect on the countries. The U.S. itself is not affected by the country-specific permanent shocks of Europe and Japan. Country-specific Europe permanent shocks transmit only to Japan and vice versa. The model identifies one symmetric transitory shock that affects all three countries and that is very persistent.