Transmission of business cycle shocks between the US and the euro area

We analyse the transmission of structural shocks between the US and the euro area within a two-country Vector Autoregressive (VAR) framework. For that purpose, we simultaneously identify cost-push, demand and monetary policy shocks for both countries using sign restrictions. Our results show that domestic shocks explain the largest share of the forecast error variances for Gross Domestic Product (GDP), consumer prices and interest rate in both countries in the short run, whilst spillovers from the other country and global factors gain importance in the medium run. The strength of the shock transmission between the two countries is quite symmetric. Our approach to the identification of structural shocks allows us to construct confidence bands that account both for estimation and identification uncertainty. We find impulse responses to domestic shocks to be significant while spillovers across countries are insignificant.