Global Shocks in the US Economy: Effects on Output and the Real Exchange Rate

Abstract

AbstractThis paper studies the effects of global shocks, relative to domestic shocks (productivity, mark-up, and demand shocks), in accounting for US business cycle fluctuations. We do this by developing and estimating a two-sector open economy dynamic stochastic general equilibrium model that features several real frictions and structural shocks. The central finding from the estimated model is that global shocks are the main driver of movements in many US macroeconomic aggregates. Particularly, we find that they explain around 40% of the variations in our main variables of interest—output and real exchange rate. This important quantitative contribution is achieved by using indirect inference estimation techniques to test the model. We identify exogenous world demand, oil price shocks, preference for exported energy-intensive goods, and the price of imported energy-intensive goods as the global shocks most prominent in causing the largest variations in economic outcomes. By contrast, foreign interest rates and preference for aggregate exported goods are found to be bystanders.