News-driven business cycles in small open economies

Vol: 
02/2014
Author name: 
Kamber G
Theodoridis K
Thoenissen C
Year: 
2014
Month: 
January
Abstract: 

The focus of this paper is on news-driven business cycles in small open economies. We make two significant contributions. First, we develop a small open economy model where the presence of financial frictions permits the replication of business cycle co-movements in response to news shocks. Second, we use VAR analysis to identify news shocks using data on four advanced small open economies. We find that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Our findings are robust across a number of alternative identification schemes.

Updated:  29 March 2024/Responsible Officer:  Crawford Engagement/Page Contact:  CAMA admin