The International Dimension of U.S. Expansions: A Structural VAR Analysis

This paper investigates the international dimension of productivity and demand shocks in the U.S. using sign restrictions based on standard theory predictions. Identifying shocks to U.S. manufacturing–our measure of tradables–we find that productivity gains have substantial aggregate demand effects, boosting U.S. consumption and investment, relative to the rest of the world, thus raising real imports; net exports and U.S. net foreign assets correspondingly decrease. At the same time, however, these shocks appreciate the U.S. real exchange rate, improve the terms of trade and raise stock prices. Shocks to the demand for U.S. manufacturing appear to have less pronounced aggregate effects, with little impact on trade and capital accounts; they lead to a (delayed) dollar appreciation, however. Our findings provide novel evidence on key channels of the international transmission of shocks, pointing to a low degree of consumption risk sharing as an essential feature of the transmission mechanism, and suggesting that strong wealth effects play an important role in generating aggregate demand fluctuations across countries.