International Propagation of News Shocks

Transcription

1 Paper by Beaudry, Dupaigne and Portier Discussion by Laura Veldkamp October discussion by L. Veldkamp

2 News Driven Business Cycles: The research agenda What are demand shocks? Can news about future productivity shocks explain part of business cycle fluctuations? Theory challenges: Labor rises on good news. Standard models predict the opposite. Data challenges: How to identify these shocks and show they matter? Beaudry and Portier (2004): In a 3-sector model with strong complementarities across sectors, news produces realistic cycles. Beaudry and Portier (2006): Stock price movements, orthogonal to current productivity, explain 50% of cyclical fluctuations. 2 discussion by L. Veldkamp

3 Key Ingredients of Beaudry-Portier (04) Three sectors: consumption C, intermediates X, capital K. Consumption production requires intermediates and capital. C t = (ax ν t + (1 a)k ν t ) 1/ν Intermediates requires technology (learned about), labor and a fixed factor. News is that intermediate good technology will improve. Capital investment requires technology (deterministic), labor and a fixed factor. 3 discussion by L. Veldkamp

4 Key Mechanisms of Beaudry-Portier (04) Why do agents work more when good news arrives? They will want to produce lots of intermediates in the future. Intermediates and capital are complements. Therefore, they will want a large capital stock. Investing a lot when the productivity shock arrives would cause consumption to fall then rebound. Agents are averse to that. Therefore, they build up capital before the shock arrives. Key assumption: A strong desire for consumption smoothing and little desire for labor supply smoothing. Greater investment is driven by more labor, not less consumption. 4 discussion by L. Veldkamp

5 This paper: A Two-Country Model Puzzle: Standard models predict that employment and investment covary negatively across countries. In the data, the opposite is true (Backus, Kehoe, Kydland 1993). Main idea: Producing final goods requires both home and foreign intermediate goods. These goods are complements. Therefore, productivity shocks in one country are good news for the other country as well. Extending the BP model to two countries can explain domestic and international co-movements. 5 discussion by L. Veldkamp

6 Additional Ingredients in This Model Technology shocks are independent across countries. Producing consumption goods in country A requires home and foreign intermediate goods (z A and z B ). c A = [bz ν A + (1 b)z ν B] 1/ν consumption intermediates produced with capital and labor (strong complements). Investment good production is similar I A = [bz ν I A + (1 b)zν I B ]1/ν I different intermediates, produced with labor. Intermediates are traded internationally, consumption and capital goods are not. 6 discussion by L. Veldkamp

7 Main Results Everyone learns that future productivity in consumption-intermediates (z) will be high in the future in country A. Capital-labor complementarity in z production makes investment and employment rise with news. Domestic business cycle picks up in A. At the same time, country B anticipates more demand for their intermediate goods. They also accumulate capital to produce more z B. Cycle picks up in B as well. Empirically, for many pairs of neighboring countries, a news shock in country A prompts a boom in A and B (1/2 the magnitude). 7 discussion by L. Veldkamp

8 Being Skeptical Strong complementarity in home and foreign inputs - Is this realistic? Why is the elasticity of home and foreign goods so low? Are there estimates that back this up? Is it consistent with small trade shares? Is it consistent with trends in international co-movement? Couldn t the complementarity alone explain co-movement? Do we need news shocks to understand international co-movement? Small differences in trade make a big difference for business cycle co-movement (Kose and Yi, JIE 06). Can this model get those magnitudes right? 8 discussion by L. Veldkamp

9 Other News-Driven Models Jaimovich and Rebelo (2007) - Use adjustment costs to capital to get agents to start working in advance of the productivity shock to build up the capital stock. Lorenzoni (2007) - Agents confuse signals about aggregate and idiosyncratic productivity. His is information about current productivity. Similar because news can look like a demand shock. Output increases without a concurrent increase in productivity. 9 discussion by L. Veldkamp

10 Other Explanations for Comovement Supply chains - Burstein and Tesar (2007) A foreigner produces an essential component for your production. Someone else could produce it, with a long construction lag. Shuts down substitution and creates a strong complementarity. Evidence on vertical supply chains supports the theory. Global aggregate information - Veldkamp and Wolfers (2007) Country-specific shocks within an industry are hard to disentangle from industry-wide shocks. Producers who see good aggregate news, attribute some of it to each country. 10 discussion by L. Veldkamp

11 Conclusions: Where does this paper get us? Provides a new explanation for international business cycle co-movement. But can this theory do better than existing ones? Tells us that news driven business cycles are consistent with a broader set of facts. Identifies a new source of demand shocks: News about future productivity increases in other countries. 11 discussion by L. Veldkamp