• The editor in charge of this paper was Fabio Canova.

  • Acknowledgments: We thank, without implicating, the editor and three anonymous referees, our discussants Emmanuel Farhi and Silvana Tenreyro, as well as Fabio Canova, Larry Christiano, Martin Eichenbaum, Fabio Ghironi, Wouter den Haan, Andrea Raffo, Sergio Rebelo, Martin Uribe and seminar participants at the Bank of Canada, Cornell University, Duke University, ECB, ESSIM 2007, the Federal Reserve Bank of Australia, the Federal Reserve Bank of San Francisco Pacific Basin conference, the Federal Reserve Bank of New York, the Federal Reserve Board, Georgetown University, MIT, the NBER Summer Institute 2007, Ohio State University, the University of Aix-Marseille II, the University of Amsterdam, UC Berkeley, the University of Bern, the University of Lausanne, and the University of Zurich for useful comments. We are grateful to Flavia Corneli, Kerstin Holzheu, and Lenno Uusküla for outstanding research assistance. Corsetti's work on this paper was part of the Pierre Werner Chair Programme on Monetary Union, at the Robert Schuman Centre of the European University Institute. The views expressed in this paper are our own, and do not reflect those of the European Central Bank or its Executive Board, of the Federal Reserve System or any institution to which we are affiliated. Corsetti is a Program Director at CEPR and Luca Dedola is a Research Fellow at CEPR.


This paper analyzes the cross-country effects of productivity and demand disturbances in the United States identified with sign restrictions based on standard theory. Productivity gains in US manufacturing increase US consumption and investment vis-à-vis foreign countries, resulting in a trade deficit and higher international prices of US goods, despite the rise in their supply. Financial adjustment works via a higher global value of US equities, real dollar appreciation, and an expansion of US gross foreign liabilities as well as assets. Positive demand shocks to US manufacturing also increase investment and cause a real dollar appreciation, but have limited effects on the trade balance and net foreign assets. Our findings emphasize the importance for macroeconomic interdependence of endogenous fluctuations in aggregate demand across countries in response to business cycle shocks.