Working Paper: CEPR ID: DP17296
Authors: Ha Bui; Zhen Huo; Andrei Levchenko; Nitya Pandalainayar
Abstract: We study international propagation of both fundamental and non-fundamental shocks in a global production network model with information frictions. Producers in a sector do not perfectly observe other country-sector fundamentals, and their production decisions depend their beliefs about worldwide exogenous states as well as other producers’ behavior. In this environment, “noise” shocks – errors in the public signals about fundamentals – propagate internationally and generate aggregate fluctuations. Using a novel panel dataset containing the frequencies of country-industry-specific economic news reports by 11 leading newspapers in the G7 plus Spain, we show that greater news coverage is associated with both smaller GDP forecast errors, and less disagreement among forecasters. We use these empirical regularities to discipline the parameters governing the severity of information frictions. We find that noise shocks are a quantitatively important source of international fluctuations. Noise shocks propagate relatively more powerfully to the more distant parts of the network, while TFP shocks propagate less powerfully to the more distant sectors in the presence of informational frictions.
Keywords: information frictions; noise shocks; global value chains; news media
JEL Codes: F41; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Greater news coverage (G14) | Smaller GDP forecast errors (E17) |
| Greater news coverage (G14) | Less disagreement among forecasters (E17) |
| Noise shocks (E32) | International fluctuations (F29) |
| Informational frictions (D89) | Dampened fluctuations driven by TFP shocks (E32) |
| Noise shocks (E32) | Propagation to distant parts of the network (D85) |