How Do the Trans‐Pacific Economies Affect the USA? An Industrial Sector Approach

Abstract

This paper studies how the Trans‐Pacific region affects the US economy in terms of business cycle transmission. We use a large data set consisting of disaggregated sectoral industrial production indexes from selected countries in the region and employ a factor‐augmented vector autoregression (FAVAR) approach to analyse the transmission of shocks in different industries. We find that a positive output shock in the entire Trans‐Pacific region has positive effects on the majority of US manufacturing sectors. We also find that sectoral shocks in five sectors of the Trans‐Pacific region have a large impact on the overall US economy. Three of the five sectors displayed strong same‐sector responses relative to the overall response, suggesting that vertical production linkages might play a key role in the transmission of shocks. Our results highlight the importance of examining industrial sectors in studying the transmission of shocks in the Trans‐Pacific region.