The International Propagation of News Shocks Paul Beaudry, Martial - PowerPoint PPT Presentation

The International Propagation of News Shocks Paul Beaudry, Martial Dupaigne & Franck Portier University of British Columbia & Universit´ e de Toulouse SED Meeting, 06.28-30.2007 Prague 1

1. Motivation • News shocks: data : Beaudry & Portier [2006, Aer; 2005, Jjie], Haertel & Lucke [2007], models : [Beaudry & Portier [2004, Jme; 2007, Jet], Christiano, Rostagno & Motto [2005], Jaimovich & Rebelo [2006], Den Haan & Kaltenbrunner [2006], Beaudry, Portier & Collard [2007] • Technological News Shocks: Short run demand shock, Long run supply shock • A source of international fluctuations? Small Open Economy: Jaimovich & Rebelo [2007]; Two-country economies: this paper 2

1.1. Business cycle comovements • Y , C , I , H are positively correlated with each other within developed countries, at business cycle frequencies � National Business Cycle (NBC) • Y , C , I , H are pairwise positively correlated among developed coun- tries, at business cycle frequencies � International Business Cycle (IBC) • Which combination(s) of impulses and propagation mechanisms can help understand these business cycle co-movements? 3

1.2. The effects of technological shocks • The international RBC literature faces huge difficulties to account for international comovements. • If countries experience different technology shocks, mobile inputs reallocate to the most productive economy, and the returns to immo- bile inputs lower. Extremely correlated technology shocks are required to match the observed correlations of inputs. • “Demand” shocks might help. Wen [2006, Jecd] 4

1.3. The nature of technological shocks • The usual assumption is that technology shocks are surprises. • Beaudry & Portier [2006, Aer] show that (permanent) technology improvements diffuse slowly over time, and are forecastable to a large extent. • In the short–run, these news shock stimulate the demand for in- vestment goods, and might not trigger reallocation. 5

Outline of the Talk 1. Motivation 2. The Propagation of News Shocks : Facts 3. NBC and IBC in a canonical model 4. NBC and IBC in an extended model 6

2. The Propagation of News Shocks: Facts 2.1. Conditional moments • If technological change diffuses slowly over time, ‘forward’ variables may react faster than usual indicators of technology. • We identify news shock using TFP (corrected for utilization) and stock market capitalization ( SP ) 7

� � � � k =0 A k L k � � � � ∆ TFP i,t ε 1 ,t I + � + ∞ ε 1 ,t • BP 2006: = A ( L ) = . ∆ SP i,t ε 2 ,t ε 2 ,t - the news shock ε 2 ,t has no impact on TFP in country i ;       ∆ TFP i,t ε 1 ,t ε 1 ,t � A k L k � I + � + ∞        = ˜ k =0 ˜ • Here ∆ SP i,t A ( L )  = ε 2 ,t ε 2 ,t     X j,t ε 3 ,t ε 3 ,t   0 A k   with ˜ 0 A k =  .  × × × - the news shock ε 2 ,t has no impact on TFP in country i ; - the third shock ε 3 ,t has no impact on TFP and stock prices in country i . 8

2.2. US news shocks and their propagation • (Corrected TFP, SP) VECM with 5 lags. • The US news shock has a significant long–run effect on US TFP and explains a large share of the forecast error. • It has almost no impact on US TFP during the first five years ⇒ this is not a TFP surprise. Response to a news shock, USA 0.7 1 CTFP CTFP 0.6 0.8 0.5 0.6 0.4 0.4 0.3 0.2 0.2 0 0.1 −0.2 0 −0.4 0 50 100 150 200 0 5 10 15 20 25 30 9

Response to a news shock, USA 1.4 3.5 0.8 C I N 1.2 3 0.6 1 2.5 0.4 0.8 2 0.6 1.5 0.2 0.4 1 0 0.2 0.5 0 0 −0.2 0 10 20 0 10 20 0 10 20 1.5 1.4 0.05 Y C+I+X−M (X−M)/Y 1.2 1 0 1 0.8 0.5 −0.05 0.6 0.4 0 −0.1 0.2 −0.5 0 −0.15 0 10 20 0 10 20 0 10 20 10

• A news shock triggers an expansion in Canada as well as in the US. Response of Canadian aggregates to a news on US TFP 1 2.5 1 C I N 0.8 2 0.8 0.6 1.5 0.6 0.4 1 0.4 0.2 0.5 0.2 0 0 0 −0.2 −0.5 −0.2 −0.4 −1 −0.4 0 10 20 0 10 20 0 10 20 1.5 1.5 0.6 Y C+I+X−M (X−M)/Y 0.4 1 1 0.2 0.5 0.5 0 0 0 −0.2 −0.5 −0.5 −0.4 0 10 20 0 10 20 0 10 20 11

2.3. German news shocks and their propagation • German data are from Haertel & Lucke [2006]. (Corrected TFP, SP) VECM with 2 lags. • The permanent improvement in TFP takes place after 4 years. Response to a news shock, Germany 0.5 1 CTFP CTFP 0.8 0.4 0.6 0.3 0.4 0.2 0.2 0 0.1 −0.2 0 −0.4 0 50 100 150 200 0 5 10 15 20 25 30 12

Response to a news shock, Germany 2 2 0.6 C I N 1.5 1.5 0.4 1 1 0.2 0.5 0.5 0 0 0 −0.2 −0.5 −0.5 −0.4 0 10 20 0 10 20 0 10 20 2 2 0.3 Y C+I+X−M (X−M)/Y 0.2 1.5 1.5 0.1 1 1 0 −0.1 0.5 0.5 −0.2 0 0 −0.3 −0.5 −0.5 −0.4 0 10 20 0 10 20 0 10 20 13

Response of Austrian aggregates to a News on German TFP 3 2 0.4 C I N 2 0.2 1 1 0 0 0 −0.2 −1 −1 −0.4 0 10 20 0 10 20 0 10 20 1.5 2 0.4 Y C+I+X−M (X−M)/Y 1 0.2 1 0.5 0 0 0 −0.2 −0.5 −1 −0.4 0 10 20 0 10 20 0 10 20 14

Response of French aggregates to a News on German TFP 1.5 5 1.2 C I N 1 4 1 0.8 3 0.6 0.5 2 0.4 1 0.2 0 0 0 −0.5 −1 −0.2 0 10 20 0 10 20 0 10 20 1.2 2 0.2 Y C+I+X−M (X−M)/Y 1 0.1 1.5 0.8 0 1 0.6 −0.1 0.4 −0.2 0.5 0.2 −0.3 0 0 −0.4 −0.2 −0.5 −0.5 0 10 20 0 10 20 0 10 20 15

Response of Bristish aggregates to a News on German TFP 2 4 1.2 C I N 1 1.5 3 0.8 1 2 0.6 0.4 0.5 1 0.2 0 0 0 −0.5 −1 −0.2 0 10 20 0 10 20 0 10 20 1.2 1.5 0.1 Y C+I+X−M (X−M)/Y 1 0 1 0.8 −0.1 0.6 −0.2 0.5 0.4 −0.3 0.2 −0.4 0 0 −0.5 −0.2 −0.5 −0.6 0 10 20 0 10 20 0 10 20 16

Response of Italian aggregates to a News on German TFP 1.5 3 0.3 C I N 2.5 0.2 1 2 0.1 1.5 0 0.5 1 −0.1 0.5 −0.2 0 0 −0.3 −0.5 −0.5 −0.4 0 10 20 0 10 20 0 10 20 1.5 1.5 0.3 Y C+I+X−M (X−M)/Y 0.2 1 1 0.1 0.5 0.5 0 0 0 −0.1 −0.5 −0.5 −0.2 0 10 20 0 10 20 0 10 20 17

2.4. What have we learned? • Conditional on news to future TFP, main macro aggregates display strong comovements across countries. • We now try to account for these findings. 18

3. NBC and IBC in a canonical model • Here we show that in a canonical model, news shocks is a IBC driving force 19

3.1. The model • A 2-country, 1-good economy. The economy is hit by technology shocks θ A,t and θ B,t . Capital quantity and location are predetermined. � � • Choose j = A,B in order to C j,t , H j,t , I j,t , K j,t +1 + ∞ β t � � � � �� � max E 0 C A,t , 1 − H A,t + U C B,t , 1 − H B,t U t =0 subject to  (1 − δ ) K A,t + I A,t  K A,t +1 ≤     (1 − δ ) K B,t + I B,t K B,t +1 ≤   � � � �  C A,t + C B,t + I A,t + I B,t K A,t , H A,t ; θ A,t + F K B,t , H B,t ; θ B,t ≤ F  � �� � � �� �     Y A,t Y B,t    K A, 0 = K B, 0 given . • We make the further simplifying assumption that preferences are separable in consumption and leisure ( U 12 = 0). 20

3.2. Some Propositions • Some propositions can be proved, that show the respective role of local/global/surprises/news in creating NBC and IBC. 21

Result 1 In response to global surprises ( θ A,t = θ B,t ∀ t ), equilibrium allocations are symmetrical. The model displays IBC. Under functional and parameters restrictions, the model also displays NBC. 22

World Technological Surprise 1.5 Θ A Θ B 1 0.5 0 0 2 4 6 8 10 0.5 15 C A I A C B I B 0.45 10 0.4 5 0.35 0 0 2 4 6 8 10 0 2 4 6 8 10 1.5 1 Y A H A Y B H B 1 0.5 0.5 0 0 −0.5 0 2 4 6 8 10 0 2 4 6 8 10 23

Result 2 If technology shocks are local and surprises (d θ A,t > 0 , d θ B,t = 0 for some t ), then hours worked are not perfectly corre- lated across countries. For realistic settings, hours and investments are negatively correlated. There is therefore no IBC and no NBC in the foreign country. 24

Local Technological Surprise 1.5 Θ A Θ B 1 0.5 0 0 2 4 6 8 10 0.3 4000 C A I A 2000 C B I B 0.25 0 −2000 0.2 −4000 0 2 4 6 8 10 0 2 4 6 8 10 100 100 Y A H A 50 50 Y B H B 0 0 −50 −50 −100 −100 0 2 4 6 8 10 0 2 4 6 8 10 25

Result 3 If technology shocks are announced/forecastable N periods in advance, then allocations are symmetrical in the N − 1 first periods of the interim period, for both world and local news ⇒ IBC. In the interim period, consumption and hours always move in opposite directions ⇒ no NBC. 26

(World) Technological News 1.5 Θ A Θ B 1 0.5 0 0 2 4 6 8 10 0.08 −2 C A I A −4 C B I B 0.06 −6 0.04 −8 0.02 −10 0 2 4 6 8 0 2 4 6 8 0 −0.2 Y A H A −0.2 −0.4 Y B H B −0.4 −0.6 −0.6 −0.8 −0.8 −1 0 2 4 6 8 0 2 4 6 8 27