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On the significance of quality-of-capital news shocks

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  • Herrera, Luis
  • Vázquez, Jesús

Abstract

This paper assesses the significance of quality-of-capital (QoC) news shocks and their transmission through the credit channel in explaining aggregate fluctuations. Our framework is an estimated medium-scale DSGE model augmented with a financial sector where two alternative sources of news shocks are considered. One is a (standard) total-factor-productivity (TFP) news shock; the other is a QoC news shock. The latter has a clear meaning that enables a close link to be built up between financial markets and the macroeconomy through the credit and expectation channels, which greatly improves model fit and largely displaces TFP news shocks as a source of the business cycle. The significance of pure (rather than realized) news underscores the role of expectations.

Suggested Citation

  • Herrera, Luis & Vázquez, Jesús, 2023. "On the significance of quality-of-capital news shocks," Economic Modelling, Elsevier, vol. 124(C).
    • Handle: RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323000950
    DOI: 10.1016/j.econmod.2023.106283
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    More about this item

    Keywords

    Quality-of-capital news; TFP news; Credit channel; Aggregate fluctuations; DSGE model; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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