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The Quantitative Importance of News Shocks in Estimated DSGE Models

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Abstract

We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and both unanticipated and news shocks, using quarterly US data from 1954-2004 and Bayesian methods. We find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output, consumption, and investment growth, interest rate, and the relative price of investment. The unanticipated shock to the marginal eficiency of investment is the dominant shock, accounting for over 45% of the variance in output growth. News shocks account for less than 15% of the variance in output growth. Within the set of news shocks, non-technology sources of news dominate technology news, with wage markup news shocks accounting for about 60% of the variance share of both hours and ination. We find that in the estimated DSGE model (a) the presence of endogenous countercyclical price and wage markups due tonominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions, and (b) while there is little change in the estimated contributions of technology news when we restrict wealth effects on labour supply, the contributions of non-technology news shocks are relatively more sensitive.

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File URL: http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2012.00543.x/pdf
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Bibliographic Info

Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 09-07.

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Length: 48 pages
Date of creation: 22 Sep 2009
Date of revision: 22 May 2012
Publication status: Published: Revised version in Journal of Money, Credit and Banking, Vol. 44, No. 8 (December 2012), pp. 1535–1561
Handle: RePEc:car:carecp:09-07

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Keywords: News shocks; Business cycles; DSGE models;

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  1. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2009. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Vanderbilt University Department of Economics Working Papers 0921, Vanderbilt University Department of Economics.
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  1. The Quantitative Importance of News Shocks in Estimated DSGE Models
    by Christian Zimmermann in NEP-DGE blog on 2009-10-06 15:53:14
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