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News Shocks and the External Finance Premium

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  • Guo Shen

    () (Central University of Finance and Economics)

Abstract

US data show that the external finance premium, measured by the high yield bond spread, moves countercyclically and leads movements in output by four quarters. This paper constructs a model with nominal rigidities and financial accelerator to explain this observation. The key finding of this paper is: it is agents' reaction on news about future technology changes that generates the observed countercyclical movement and lead-lag pattern of the external finance premium, while a contemporary technology shock generates a procyclical movement of the external finance premium. The variance decomposition based on the estimated model demonstrates that news shocks account for about 72% of fluctuations in the external finance premium.

Suggested Citation

  • Guo Shen, 2011. "News Shocks and the External Finance Premium," The B.E. Journal of Macroeconomics, De Gruyter, vol. 11(1), pages 1-27, December.
  • Handle: RePEc:bpj:bejmac:v:11:y:2011:i:1:n:40
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    References listed on IDEAS

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    1. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
    2. Kobayashi Keiichiro & Nutahara Kengo, 2010. "Nominal Rigidities, News-Driven Business Cycles, and Monetary Policy," The B.E. Journal of Macroeconomics, De Gruyter, vol. 10(1), pages 1-26, September.
    3. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    4. Keiichiro Kobayashi & Kengo Nutahara, 2007. "Collateralized capital and news-driven cycles," Economics Bulletin, AccessEcon, vol. 5(18), pages 1-9.
    5. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2011. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 1-29, February.
    6. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
    7. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-1085, December.
    8. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.

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