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Estimating Macroeconomic News and Surprise Shocks

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Abstract

The importance of understanding the economic effects of TFP news and surprise shocks is widely recognized in the literature. A common VAR approach is to identify responses to TFP news shocks by maximizing the variance share of TFP over a long horizon. Under suitable conditions, this approach also implies an estimate of the surprise shock. We find that these TFP max share estimators tend to be strongly biased when applied to data generated from DSGE models with shock processes that match the TFP moments in the data, both in the presence of TFP measurement error and in its absence. Incorporating a measure of TFP news into the VAR model and adapting the identification strategy substantially reduces the bias and RMSE of the impulse response estimates, even when there is sizable measurement error in the news variable. When applying this method to the data, we find that news shocks are slower to diffuse to TFP and have a smaller effect on real activity than implied by the TFP max share method.

Suggested Citation

  • Lutz Kilian & Michael D. Plante & Alexander W. Richter, 2023. "Estimating Macroeconomic News and Surprise Shocks," Working Papers 2304, Federal Reserve Bank of Dallas, revised 22 Mar 2024.
    • Handle: RePEc:fip:feddwp:96048
    DOI: 10.24149/wp2304r2
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    Keywords

    Structural VAR; total factor productivity (TFP); news; Measurement error; max-share;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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