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Does demand noise matter? Identification and implications

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  • Benhima, Kenza
  • Poilly, Céline

Abstract

We assess the role of demand noise (excessive optimism or pessimism about demand) together with supply noise (excessive optimism or pessimism about supply). To do so, we propose a methodology to decompose business cycles into supply, demand, supply noise and demand noise shocks, using a structural vector autoregression model. Key to our identification of both supply noise and demand noise is the use of sign restrictions on survey expectation errors about output growth and about inflation. We show that demand-related noise shocks have a negative effect on output and contribute substantially to its fluctuations. Monetary policy and private information seem to play a key role in the transmission of demand noise shocks.

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  • Benhima, Kenza & Poilly, Céline, 2021. "Does demand noise matter? Identification and implications," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 278-295.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:278-295
    DOI: 10.1016/j.jmoneco.2020.01.006
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    Cited by:

    1. Nicolas Reigl, 2023. "Noise shocks and business cycle fluctuations in three major European Economies," Empirical Economics, Springer, vol. 64(2), pages 603-657, February.
    2. Edward P. Herbst & Fabian Winkler, 2021. "The Factor Structure of Disagreement," Finance and Economics Discussion Series 2021-046, Board of Governors of the Federal Reserve System (U.S.).
    3. Ambrocio, Gene, 2020. "European household and business expectations during COVID-19: Towards a v-shaped recovery in confidence?," BoF Economics Review 6/2020, Bank of Finland.

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    More about this item

    Keywords

    Business cycle; Information friction; Noise shock; SVAR with sign restriction;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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