News Shocks Across Countries1

We estimate the role of news shocks to TFP, foreign interest rates (FIR) and commodity terms of trade (CToT) in explaining the variance of output and other macro aggregates across countries. To correct for small-sample bias in the variance decomposition estimates, we develop a Bootstrap-after-Bootstrap method and find that the mean difference of variance share of output explained by news shocks between developing and developed countries is: I) Negligible for news shocks to TFP. II) Positive for news shocks to FIR and to CToT. Using cross-sectional data, we find that countries with less financial development have a larger share of output variance explained by news shocks to FIR, and countries with less developed financial derivatives markets exhibit a larger share of output variance explained by news shocks to CToT. A two-sector small open economy model with non-financially included households and hedging in commodity prices rationalizes these facts