We address the question of business cycle co-movements within and between countries. We first show that for the U.S. and Canada as well as for Germany and Austria, a stock market innovation in the large country, that does not affect Total Factor Productivity in the short run, does indeed explain much of Total Factor Productivity changes in the long run. We therefore label such a shock a news about Total Factor Productivity of the large country. This shock is shown to act as a demand shock in the data, creating a boom in the large country as well as in the small one. Second, we propose a two-country-two-sector model that is shown to give realistic quantitative predictions. The model builds on the closed economy model of Beaudry and Portier [2004], in which there are limited possibilities to reallocate factors between investment and consumption good sectors. We also show that a canonical Real Business Cycle two-country model cannot account for those responses to technological news shocks we have identified in the data.
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