Does an improvement in growth prospects (technological news shock) lead to a fall in the trade balance? We introduce a novel news shock identification scheme and obtain in a panel vector autoregression (VAR) for the G7 countries the following results. Positive news shocks have negative effects on the trade balance in the United States and Japan. However, in other G7 countries, the effects are positive to a great extent. The differences in trade balance dynamics are mainly due to heterogeneous reactions of labour markets and wealth effects. Further, the terms of trade and exchange rate movements play an important role in explaining the results. Therefore, policy recommendations aimed at reducing the trade imbalances through productivity‐enhancing reforms in advanced economies might not entail the targeted effects.

Since at least the mid-2000s, many advanced economies have experienced low productivity growth. This development is often related to declining productivity gains at the technology frontier, which is largely determined by the US. We challenge this explanation by studying the effects of US technology shocks on productivity levels in advanced economies. We find positive but small spillovers of US technology shocks. For many countries, the elasticity of their productivity with respect to a 1% increase in the US technology level is significantly lower than 1. Thus, the recent US productivity slowdown must have had a limited effect on productivity developments in advanced economies. Nevertheless, after 5 years, the degree of productivity spillovers varies across countries. Therefore, we analyze the role of institutions in shaping these results. Our findings suggest that isolated institutional characteristics are not able to explain the observed various spillover degrees.

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