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News-driven business cycles in small open economies

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  • Gunes Kamber
  • Konstantinos Theodoridis
  • Christoph Thoenissen

Abstract

The focus of this paper is on expectations driven business cycles in small open economies. We make two significant contributions. First, we identify news shocks for a set advanced small open economies using the methodology of Beaudry et al. (2011). We find, in line with the previous VAR evidence for the US economy that expected shocks about the future Total Factor Productivity generate business cycle co-movements in output, hours, consumption and investment. We also find that news shocks are associated with countercyclical current account dynamics. Second, we develop a small open economy model with financial frictions, along the lines of Jermann and Quadrini (2012) that is able to replicate the positive co-movements identified in the data.

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File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2014-01/2_2014_kamber_theodoridis_thoenissen.pdf
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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-02.

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Length: 50 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-02

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Related research

Keywords: News shocks; business cycles; open economy macroeconomics; financial frictions; VAR;

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References

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  1. Gary Koop, 2011. "Forecasting with Medium and Large Bayesian VARs," Working Papers 1117, University of Strathclyde Business School, Department of Economics.
  2. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers 274, Federal Reserve Bank of Minneapolis.
  3. Hashmat Khan & John Tsoukalas, 2012. "The Quantitative Importance of News Shocks in Estimated DSGE Models," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1535-1561, December.
  4. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, vol. 80(6), pages 2733-2764, November.
  5. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
  6. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Levine's Working Paper Archive 122247000000002352, David K. Levine.
  7. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account For The Influence Of Foreign Disturbances?," CAMA Working Papers 2006-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  8. Nir Jaimovich & Sergio Rebelo, 2007. "News and Business Cycles in Open Economies," NBER Working Papers 13444, National Bureau of Economic Research, Inc.
  9. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," 2006 Meeting Papers 31, Society for Economic Dynamics.
  10. Marta Banbura & Domenico Giannone & Lucrezia Reichlin, 2010. "Large Bayesian vector auto regressions," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 71-92.
  11. Theodoridis, Konstantinos & Zanetti, Francesco, 2014. "News and labour market dynamics in the data and in matching models," Bank of England working papers 488, Bank of England.
  12. Susanto Basu & John Fernald & Miles Kimball, 1998. "Are technology improvements contractionary?," International Finance Discussion Papers 625, Board of Governors of the Federal Reserve System (U.S.).
  13. André Kurmann & Christopher Otrok, 2012. "News shocks and the slope of the term structure of interest rates," Working Papers 2012-011, Federal Reserve Bank of St. Louis.
  14. Marta Bańbura, 2008. "Large Bayesian VARs," 2008 Meeting Papers 334, Society for Economic Dynamics.
  15. Beaudry, Paul & Portier, Franck, 2001. "An Exploration into Pigou's Theory of Cycles," CEPR Discussion Papers 2996, C.E.P.R. Discussion Papers.
  16. Oscar Pavlov & Mark Weder, 2013. "Countercyclical Markups and News-Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 371-382, April.
  17. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "What's News in Business Cycles," CEPR Discussion Papers 8984, C.E.P.R. Discussion Papers.
  18. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
  19. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  20. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  21. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Closing Small Open Economy Models," Departmental Working Papers 200115, Rutgers University, Department of Economics.
  22. Beaudry, Paul & Dupaigne, Martial & Portier, Franck, 2009. "Modeling News-Driven International Business Cycles," TSE Working Papers 09-117, Toulouse School of Economics (TSE).
  23. Pinter, Gabor & Theodoridis, Konstantinos & Yates, Tony, 2013. "Risk news shocks and the business cycle," Bank of England working papers 483, Bank of England.
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