An Empirical Analysis of the Productivity Shock Correlations between US and Rest of the World—Trends, Factors and the Role of Recessions

This study uses quarterly data for a group of advanced and emerging market economies to study the role of TFP correlations between the US and the Rest of the World. Following Bosworth and Collins [1], Solow residuals are constructed to proxy for TFP shocks. Then, bilateral correlations with the US are calculated. Recent theoretical studies have emphasized the importance of TFP shock correlations for portfolio choice. The data suggests that the correlations are indeed very volatile and drop sharply during recessions. Arellano-Bond [2] regressions suggest that US Recessions are associated with a drop in cross-country productivity correlations in the medium and long term intervals.