How Do the Trans‐Pacific Economies Affect the USA? An Industrial Sector Approach

This paper studies how the Trans-Pacific region affects the US economy in terms of business cycle transmission. We use a large data set consisting of disaggregated sectoral industrial production indexes from selected countries in the region and employ a factor-augmented vector autoregression (FAVAR) approach to analyse the transmission of shocks in different industries. We find that a positive output shock in the entire Trans-Pacific region has positive effects on the majority of US manufacturing sectors. We also find that sectoral shocks in five sectors of the Trans-Pacific region have a large impact on the overall US economy. Three of the five sectors displayed strong same-sector responses relative to the overall response, suggesting that vertical production linkages might play a key role in the transmission of shocks. Our results highlight the importance of examining industrial sectors in studying the transmission of shocks in the Trans-Pacific region.