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Title: International information flows, sentiments and cross-country business cycle fluctuations Authors:  Michal Brzoza-Brzezina - Narodowy Bank Polski (Poland)
Jacek Kotlowski - SGH Warsaw School of Economics (Poland) [presenting]
Grzegorz Wesolowski - Narodowy Bank Polski (Poland)
Abstract: Business cycles are strongly correlated between countries. One possible explanation (beyond traditional economic linkages like trade or finance) is that consumer or business sentiments spread over boarders and affect cyclical fluctuations in various countries. We first lend empirical support to this concept by showing that sentiments travel between countries at a speed much higher than can be explained by traditional linkages. Then we construct a two-economy new Keynesian model where noisy international information can generate cyclical fluctuations (co-movement of GDP, consumption, investment and inflation) in both countries. Estimation with US and Canadian data reveals a significant role of international noise shocks in generating such common fluctuations - for instance they explain between 15-30\% of consumption variance in the US and Canada. Finally we show that our estimated noise shocks can indeed be interpreted as sentiment shock.