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News, Noise, and Fluctuations: An Empirical Exploration

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

We explore empirically models of aggregate fluctuations in which consumers form anticipations about the future based on noisy sources of information and these anticipations affect output in the short run. Our objective is to separate fluctuations due to changes in fundamentals (news) from those due to temporary errors in agents' estimates (noise). We show that structural VARs cannot be used to identify news and noise shocks, but identification is possible via a method of moments or maximum likelihood. Next, we estimate our model on US data. Our results suggest that noise shocks explain a sizable fraction of short-run consumption fluctuations.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 103 (2013)
Issue (Month): 7 (December)
Pages: 3045-70

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Handle: RePEc:aea:aecrev:v:103:y:2013:i:7:p:3045-70
Note: DOI: 10.1257/aer.103.7.3045
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  1. Paul Beaudry & Franck Portier, 2006. "Stock Prices, News, and Economic Fluctuations," American Economic Review, American Economic Association, vol. 96(4), pages 1293-1307, September.
  2. Danny Quah, 1988. "The Relative Importance of Permanent and Transitory Components: Identification and Some Theoretical Bounds," Working papers 498, Massachusetts Institute of Technology (MIT), Department of Economics.
  3. Mark Aguiar & Gita Gopinath, 2007. "Emerging Market Business Cycles: The Cycle Is the Trend," Journal of Political Economy, University of Chicago Press, vol. 115, pages 69-102.
  4. 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.
  5. Lippi, Francesco & Neri, Stefano, 2007. "Information variables for monetary policy in an estimated structural model of the euro area," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1256-1270, May.
  6. 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.
  7. Todd B. Walker & Eric M. Leeper & Shu-Chun S. Yang, 2012. "Fiscal Foresight and Information Flows," IMF Working Papers 12/153, International Monetary Fund.
  8. Richard Blundell & Ian Preston, 1997. "Consumption, inequality and income uncertainty," IFS Working Papers W97/15, Institute for Fiscal Studies.
  9. Aguiar, Mark & Gopinath, Gita, 2007. "Emerging Market Business Cycles: The Cycle is the Trend," Scholarly Articles 11988098, Harvard University Department of Economics.
  10. 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.
  11. Emine Boz & Christian Daude & Ceyhun Bora Durdu, 2008. "Emerging market business cycles revisited: learning about the trend," International Finance Discussion Papers 927, Board of Governors of the Federal Reserve System (U.S.).
  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, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  14. Lippi, Francesco & Neri, Stefano, 2003. "Information Variables for Monetary Policy in a Small Structural Model of the Euro Area," CEPR Discussion Papers 4125, C.E.P.R. Discussion Papers.
  15. 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.
  16. 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.
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