A Note on Information Flows and Identification of News Shocks Models
AbstractThis note points out a hitherto unrecognised identification issue in a class of rational expectations (RE) models with news shocks. We show that different degrees of anticipation (information flows) have strikingly different implications for the identifiability of the underlying structural model, irrespective of its non-fundamental time-series representation. In particular, under full shock anticipation equilibrium reduced forms behave as noisy perfect foresight state motions, which are non-identifiable. As a consequence, the underlying news shocks model fails to be (first-order) identified. The identification failure is illustrated with a New Keynesian model that can be solved analytically.
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Bibliographic InfoArticle provided by Economics and Econometrics Research Institute (EERI), Brussels in its journal Journal of Economics and Econometrics.
Volume (Year): 56 (2013)
Issue (Month): 1 ()
Rational expectations; perfect foresight; news shocks; identification.;
Other versions of this item:
- Marco M. Sorge, 2013. "A Note on Information Flows and Identification of News Shocks Models," EERI Research Paper Series EERI RP 2013/08, Economics and Econometrics Research Institute (EERI), Brussels.
- C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
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- Paul Beaudry & Franck Portier, 2013.
"News Driven Business Cycles: Insights and Challenges,"
NBER Working Papers
19411, National Bureau of Economic Research, Inc.
- Franck Portier, 2014. "News Driven Business Cycles: Insights and Challenges," 2014 Meeting Papers 289, Society for Economic Dynamics.
- Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.
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