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News and Financial Intermediation in Aggregate Fluctuations

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  • Görtz, Christoph
  • Tsoukalas, John

Abstract

We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34113.

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Date of creation: Mar 2011
Date of revision: Oct 2011
Handle: RePEc:pra:mprapa:34113

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Keywords: News; Anticipation effects; Business cycles; DSGE; Bayesian estimation;

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References

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Cited by:
  1. Stephane Auray & Paul Gomme & Shen Guo, 2012. "Nominal Rigidities, Monetary Policy and Pigou Cycles," Working Papers 12006, Concordia University, Department of Economics.
  2. Beaudry, Paul & Portier, Franck, 2013. "News Driven Business Cycles: Insights and Challenges," CEPR Discussion Papers 9624, C.E.P.R. Discussion Papers.
  3. Francesco Zanetti & Konstantinos Theodoridis, 2014. "News and Labor Market Dynamics in the Data and in Matching Models," Economics Series Working Papers 699, University of Oxford, Department of Economics.

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