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 InfoPaper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI RP 2013/08.
Date of creation: 08 Apr 2013
Date of revision:
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," Journal of Economics and Econometrics, Economics and Econometrics Research Institute (EERI), Brussels, vol. 56(1), pages 28-38.
- 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
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-04-27 (All new papers)
- NEP-DGE-2013-04-27 (Dynamic General Equilibrium)
- NEP-ECM-2013-04-27 (Econometrics)
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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.
- 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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