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News, Noise, and Fluctuations: An Empirical Exploration

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  • Olivier J. Blanchard
  • Jean-Paul L'Huillier
  • Guido Lorenzoni

Abstract

We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information; these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in the private sector's estimates of these fundamentals (noise). Using a simple model where the consumption random walk hypothesis holds exactly, we address some basic methodological issues and take a first pass at the data. First, we show that if the econometrician has no informational advantage over the agents in the model, structural VARs cannot be used to identify news and noise shocks. Next, we develop a structural Maximum Likelihood approach which allows us to identify the model's parameters and to evaluate the role of news and noise shocks. Applied to postwar U.S. data, this approach suggests that noise shocks play an important role in short-run fluctuations.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15015.

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Date of creation: May 2009
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Handle: RePEc:nbr:nberwo:15015

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  1. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
  2. Nir Jaimovich & Sergio Rebelo, 2009. "Can News about the Future Drive the Business Cycle?," American Economic Review, American Economic Association, vol. 99(4), pages 1097-1118, September.
  3. Mark Aguiar & Gita Gopinath, 2004. "Emerging market business cycles: the cycle is the trend," Working Papers 04-4, Federal Reserve Bank of Boston.
  4. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2009. "Fiscal Foresight and Information Flows," NBER Working Papers 14630, National Bureau of Economic Research, Inc.
  5. Emine Boz & Christian Daude & C. Bora Durdu, 2011. "Emerging Market Business Cycles Revisited: Learning about the Trend," Koç University-TUSIAD Economic Research Forum Working Papers 1110, Koc University-TUSIAD Economic Research Forum.
  6. Lars Peter Hansen & Ellen R. McGrattan & Thomas J. Sargent, 1994. "Mechanics of forming and estimating dynamic linear economies," Staff Report 182, Federal Reserve Bank of Minneapolis.
  7. Danny Quah, 1991. "The Relative Importance of Permanent and Transitory Components: Identi- fication and Some Theoretical Bounds," NBER Technical Working Papers 0106, National Bureau of Economic Research, Inc.
  8. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  9. Robert B. Barsky & Eric R. Sims, 2009. "Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence," NBER Working Papers 15049, National Bureau of Economic Research, Inc.
  10. Richard Blundell & Ian Preston, 1998. "Consumption Inequality And Income Uncertainty," The Quarterly Journal of Economics, MIT Press, vol. 113(2), pages 603-640, May.
  11. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2011. "Foresight and Information Flows," NBER Working Papers 16951, National Bureau of Economic Research, Inc.
  12. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  13. Guido Lorenzoni, 2009. "A Theory of Demand Shocks," American Economic Review, American Economic Association, vol. 99(5), pages 2050-84, December.
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Citations

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Cited by:
  1. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.
  2. George-Marios Angeletos & Jennifer La'O, 2011. "Decentralization, Communication, and the Origins of Fluctuations," NBER Working Papers 17060, National Bureau of Economic Research, Inc.
  3. Vega, Hugo, 2010. "Total factor productivity and signal noise volatility in an incomplete information setting," Working Papers 2010-014, Banco Central de Reserva del Perú.
  4. repec:dgr:uvatin:2010098 is not listed on IDEAS
  5. D'Elia, Enrico, 2010. "Predictions vs preliminary sample estimates," MPRA Paper 36070, University Library of Munich, Germany.
  6. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  7. Robert Barsky, 2010. "News Shocks," 2010 Meeting Papers 95, Society for Economic Dynamics.
  8. Born, Benjamin & Peter, Alexandra & Pfeifer, Johannes, 2013. "Fiscal news and macroeconomic volatility," Journal of Economic Dynamics and Control, Elsevier, vol. 37(12), pages 2582-2601.
  9. Patrick Hürtgen, 2011. "Consumer Misperceptions, Uncertain Fundamentals, and the Business Cycle," Bonn Econ Discussion Papers bgse10_2011, University of Bonn, Germany.
  10. Alejandro Justiniano & Claudio Michelacci, 2011. "The Cyclical Behavior of Equilibrium Unemployment and Vacancies in the US and Europe," NBER Working Papers 17429, National Bureau of Economic Research, Inc.
  11. Rousakis, Michael, 2012. "Expectations and Fluctuations : The Role of Monetary Policy," The Warwick Economics Research Paper Series (TWERPS) 984, University of Warwick, Department of Economics.
  12. Enrico D'Elia, 2014. "Predictions vs. preliminary sample estimates: the case of eurozone quarterly GDP," Working Papers 2, Department of the Treasury, Ministry of the Economy and of Finance.

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