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

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References

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  1. Schmitt-Grohe, Stephanie & Uribe, Martin, 2003. "Closing small open economy models," Journal of International Economics, Elsevier, Elsevier, vol. 61(1), pages 163-185, October.
  2. Alejandro Justiniano & Bruce Preston, 2006. "Can Structural Small Open Economy Models Account For The Influence Of Foreign Disturbances?," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2006-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  3. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," IMES Discussion Paper Series, Institute for Monetary and Economic Studies, Bank of Japan 08-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
  4. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 309-327, April.
  5. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are Technology Improvements Contractionary?," NBER Working Papers 10592, National Bureau of Economic Research, Inc.
  6. Bańbura, Marta & Giannone, Domenico & Reichlin, Lucrezia, 2008. "Large Bayesian VARs," Working Paper Series, European Central Bank 0966, European Central Bank.
  7. Jaimovich, Nir & Rebelo, Sérgio, 2006. "Can News About the Future Drive the Business Cycle?," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5877, C.E.P.R. Discussion Papers.
  8. Paul Beaudry & Martial Dupaigne & Franck Portier, 2011. "Modeling News-Driven International Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 72-91, January.
  9. Hashmat Khan & John Tsoukalas, 2009. "The Quantitative Importance of News Shocks in Estimated DSGE Models," Carleton Economic Papers, Carleton University, Department of Economics 09-07, Carleton University, Department of Economics, revised 22 May 2012.
  10. Oscar Pavlov & Mark Weder, 2011. "Countercyclical Markups and News-Driven Business Cycles," School of Economics Working Papers, University of Adelaide, School of Economics 2011-28, University of Adelaide, School of Economics.
  11. Litterman, Robert B, 1986. "Forecasting with Bayesian Vector Autoregressions-Five Years of Experience," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 4(1), pages 25-38, January.
  12. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1183-1216, September.
  13. Nir Jaimovich & Sergio Rebelo, 2008. "News and Business Cycles in Open Economies," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 40(8), pages 1699-1711, December.
  14. Andr? Kurmann & Christopher Otrok, 2013. "News Shocks and the Slope of the Term Structure of Interest Rates," American Economic Review, American Economic Association, American Economic Association, vol. 103(6), pages 2612-32, October.
  15. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  16. Stephanie Schmitt‐Grohé & Martín Uribe, 2012. "What's News in Business Cycles," Econometrica, Econometric Society, Econometric Society, vol. 80(6), pages 2733-2764, November.
  17. Theodoridis, Konstantinos & Zanetti, Francesco, 2014. "News and labour market dynamics in the data and in matching models," Bank of England working papers, Bank of England 488, Bank of England.
  18. Schmitt-Grohé, Stephanie & Uribe, Martín, 2012. "What's News in Business Cycles," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8984, C.E.P.R. Discussion Papers.
  19. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  20. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 58(3), pages 273-289.
  21. Gary Koop, 2010. "Forecasting with Medium and Large Bayesian VARs," Working Paper Series, The Rimini Centre for Economic Analysis 43_10, The Rimini Centre for Economic Analysis.
  22. Pinter, Gabor & Theodoridis, Konstantinos & Yates, Tony, 2013. "Risk news shocks and the business cycle," Bank of England working papers, Bank of England 483, Bank of England.
  23. Koop, Gary, 2011. "Forecasting with Medium and Large Bayesian VARs," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-38, Scottish Institute for Research in Economics (SIRE).
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