Synchronization vs. Transmission: The Effect of the German Slowdown on the Italian Business Cycle

This work studies the transmission of the business cycle across countries by analyzing the effects of the 2018 German slowdown on Italian activity. We apply a difference-indifferences strategy to expectations data from Banca d'Italia's Survey of Inflation and Growth Expectations (SIGE). Firms exporting to Germany had lower expectations for the Italian economy (sentiment) and for their own demand, investment, and employment (assessment) than firms exporting to other countries or not exporting at all. We quantify the response of key Italian macroeconomic aggregates to worsening sentiment and assessment of Italian firms using a forecasting model. A significant contemporaneous impact on Italian GDP highlights the role of the expectations of firms exposed to foreign markets in transmitting foreign business cycle.