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Man-bites-dog business cycles

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Abstract

The newsworthiness of an event is partly determined by how unusual it is and this paper investigates the business cycle implications of this fact. In particular, we analyze the consequences of information structures in which some types of signals are more likely to be observed after unusual events. Such signals may increase both uncertainty and disagreement among agents and when embedded in a simple business cycle model, can help us understand why we observe (i) occasional large changes in macro economic aggregate variables without a correspondingly large change in underlying fundamentals (ii) persistent periods of high macroeconomic volatility and (iii) a positive correlation between absolute changes in macro variables and the cross-sectional dispersion of expectations as measured by survey data. These results are consequences of optimal updating by agents when the availability of some signals is positively correlated with tail-events. The model is estimated by likelihood based methods using individual survey responses and a quarterly time series of total factor productivity along with standard aggregate time series. The estimated model suggests that there have been episodes in recent US history when the impact on output of innovations to productivity of a given magnitude was more than eight times as large compared to other times.

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Bibliographic Info

Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1341.

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Date of creation: Dec 2011
Date of revision: Dec 2013
Handle: RePEc:upf:upfgen:1341

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  1. Yes, there is a confidence fairy
    by chris dillow in Stumbling and Mumbling on 2014-06-21 12:58:14
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Cited by:
  1. Paul Beaudry & Franck Portier, 2013. "News Driven Business Cycles: Insights and Challenges," NBER Working Papers 19411, National Bureau of Economic Research, Inc.
  2. Leonardo Melosi, 2013. "Signaling Effects of Monetary Policy," PIER Working Paper Archive 13-029, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  3. Laura Veldkamp & Anna Orlik, 2013. "Understanding Uncertainty Shocks," 2013 Meeting Papers 391, Society for Economic Dynamics.

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