Stochastic Growth in the United States and Euro Area

Abstract

This paper estimates, using data from the United States and the Euro Area, a two‐country stochastic growth model in which both neutral and investment‐specific technology shocks are nonstationary but cointegrated across economies. The results point to large and persistent swings in productivity, both favorable and adverse, originating in the United States but not transmitted to the Euro Area. More specifically, the results suggest that while the Euro Area missed out on the period of rapid investment‐specific technological change enjoyed in the United States during the 1990s, it also escaped the stagnation in neutral technological progress that plagued the United States in the 1970s.

Investment-specific technology shocks and international business cycles: An empirical assessment

“…In that sense, our model is closely related to Ireland (2009) Our results indicate that while a calibration of the IST shocks along the lines of Ra¤o (2009) would su¢ ce to address the above-mentioned puzzles, the data indicate the contrary: the estimated process for the IST shocks is powerless to solve them. Ra¤o (2009) calibrates the variance of the IST processes to be almost three times the one characterizing the TFP process.…”

Exchange Rates and Fundamentals: Closing a Two-Country Model

“…The cointegration restriction that Assumption 3 imposes on the two countries' TFPs is adopted by recent open-economy DSGE studies by Mandelman et al (2011), and Ireland (2013. ECMs (10) imply that the cross-country TFP differential is I(0) because…”

“…In this model, the exogenous endowment processes of the two countries consist of both permanent and transitory components. I then allow the stochastic trends of the two countries, which are interpreted as their TFPs, to be cointegrated, as emphasized in recent papers by Mandelman et al (2011), and Ireland (2013 in the context of international business cycles. In this case, because the TFP differential is stationary in population, a balanced growth path is guaranteed to exist in equilibrium.…”

The Role of Investment-Specific Technology Shocks in Driving International Business Cycles: A Bayesian Approach

“…In contrast, empirical works such as King et al (1991), Gali (1999), and Fisher (2006) point out other shocks in explaining the fluctuations in key macroeconomic aggregates. Recently, Smets and Wouters (2007), , Ireland (2013), and Jacob and Peersman (2013) systematically evaluate the importance of technology shocks in causing business cycles in closed and open economy settings. 1 An objective of this paper is to use a system-based approach to evaluate the relative importance of technology shocks in accounting for the observed cross-country comovement in economic fluctuations.…”