The Effects of Surprise and Anticipated Technology Changes on International Relative Prices and Trade∗

This paper argues that it is important to distinguish surprise and anticipated components of total factor productivity (TFP) when we study the international transmission of TFP shocks. We document that surprise and anticipated shocks to US TFP induce distinct dynamics for international relative prices (the real exchange rate and the terms of trade) and international trade. These findings are robust under two fundamentally different identification methods. Our empirical findings can reconcile some conflicting empirical results in the literature and hence lead to a better understanding of the international transmission of TFP shocks. We evaluate a standard international macroeconomic model using our empirical results. The model cannot generate the documented dynamics of international relative prices, though it can replicate the dynamics of other variables relatively well. Anticipated TFP shocks are also found to contribute more than surprise TFP shocks to real exchange rate movements lending support to the studies of exchange rates as asset prices. JEL Classification: E32 F31 F4