The effects of surprise and anticipated technology changes on international relative prices and trade

Abstract

This paper argues that it is important to distinguish surprise and anticipated components of total factor productivity (TFP) when we study the international transmission of TFP shocks. We document that surprise and anticipated shocks to US TFP induce distinct dynamics for international relative prices (the real exchange rate and the terms of trade) and international trade. These findings are robust under two fundamentally different identification methods. Our empirical findings can reconcile some conflicting empirical results in the literature and hence lead to a better understanding of the international transmission of TFP shocks. We evaluate a standard international macroeconomic model using our empirical results. The model cannot generate the documented dynamics of international relative prices, though it can replicate the dynamics of other variables relatively well. Anticipated TFP shocks are also found to contribute more than surprise TFP shocks to real exchange rate movements lending support to the studies of exchange rates as asset prices.JEL Classification: E32 F31 F41

Asymmetric effects of shocks on TFP

“…It is obtained from John Fernald's website and is provided in terms of annualized percentage changes (i.e., 400 times changes in its logarithm). The quarterly TFP series in levels is recovered by dividing the original series by 400 and then cumulating the resulting series (Nam and Wang (2015)).…”

News-Driven Business Cycles in Small Open Economies

“…Research by Nam and Wang (2015) lends credence to this view. They use an identification method that divides TFP shocks into a contemporaneous as well as an anticipated, or news, component.…”

“…There are two notable exceptions. The aforementioned Nam and Wang (2015), who focus exclusively on the US economy and a recent paper by Fratzscher and Straub (2013). The latter authors use a canonical two-country new Keynesian model in which news shocks are used to identify changes in asset prices that are not related to current fundamentals.…”

Growth Prospects and the Trade Balance in Advanced Economies*

“…We are aware of four notable exceptions. Nam and Wang (2015) analyse the effects of news shocks for the US economy and find a significant deterioration of the trade balance accompanied by a sizeable appreciation of the terms of trade. Similar results are reported for Australia, Canada, New Zealand, and the United Kingdom in Kamber, Theodoridis, and Thoenissen (2017).…”

“…Finally, Arezki et al (2017) use worldwide giant oil and gas discoveries 7 Explaining the trade balance effects of the two types of shocks in the presence of relative price movements is quite challenging. Nam and Wang (2015) show that the terms of trade are an important transmission channel for trade adjustments and cross-country wealth effects. Enders and Müller (2009) study the transmission of unanticipated technology shocks to the US trade balance in the presence of the terms of trade adjustments.…”