News Shocks, Business Cycles, and the Disinflation Puzzle

We argue that key findings of the recent empirical literature on the effects of news about future technology — including their tendency to generate negative comovement of macroeconomic aggregates, and their puzzling disinflationary nature — are due to measurement errors in total factor productivity (TFP). Reduced-form innovations to TFP, which are typically identified as unanticipated technology shocks, are found to generate anomalous responses that are inconsistent with the interpretation of these disturbances as supply shocks, thus hinting at the presence of an unpurged non-technological component in measured TFP. Such an impurity undermines existing identification schemes, which are based on the premise that measured TFP is entirely driven by surprise and news shocks to technology. In this paper, we estimate the macroeconomic effects of news shocks in the U.S. using an agnostic identification approach that is robust to measurement errors in TFP. We find no evidence of negative comovement conditional on a news shock, and the disinflation puzzle essentially vanishes under our identification strategy. Our results also indicate that news shocks have become an important driver of business-cycle fluctuations in recent years.