Events

Dr Zhen HUO
Associate Professor of Economics
Yale University

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. The calibration implies that noise shocks can
be a quantitatively important source of international fluctuations. Noise shocks propagate more
powerfully to the more distant parts of the production network.