TFP, News, and "Sentiments: " The International Transmission of Business Cycles / Andrei A. Levchenko, Nitya Pandalai-Nayar.

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Levchenko, Andrei A

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w21010.Publication details: Cambridge, Mass. National Bureau of Economic Research 2015.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: We propose a novel identification scheme for a non-technology business cycle shock, that we label "sentiment." 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 "sentiment" - 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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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w21010 (Browse shelf(Opens below))	Not For Loan

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March 2015.

We propose a novel identification scheme for a non-technology business cycle shock, that we label "sentiment." 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 "sentiment" - 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.