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TFP news, stock market booms and the business cycle: Revisiting the evidence with VEC models

Author

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  • Di Casola, Paola

    (Monetary Policy Department, Central Bank of Sweden)

  • Sichlimiris, Spyridon

    (Research Department, Central Bank of Sweden)

Abstract

Beaudry and Portier (2006) provide support for the "news view" of the business cycle, using a vector error correction model. We show that this result hinges on a cointegrating relationship between TFP and stock prices that is not stationary, thus making the estimates not reliable. If we alter the TFP measure and change the model specification, we can recover the news shock through their identification. However, the news shock leads to a stock market boom with a negligible impact on economic activity. Our findings are in line with studies that identify news shocks without relying on VEC models.

Suggested Citation

  • Di Casola, Paola & Sichlimiris, Spyridon, 2020. "TFP news, stock market booms and the business cycle: Revisiting the evidence with VEC models," Working Paper Series 388, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0388
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    References listed on IDEAS

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    1. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
    2. Di Casola, Paola & Sichlimiris, Spyridon, 2018. "Towards Technology-News-Driven Business Cycles," Working Paper Series 360, Sveriges Riksbank (Central Bank of Sweden).
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    More about this item

    Keywords

    cointegration; technology news shocks; stock prices; TFP; VEC model;
    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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