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What׳s news in News? A cautionary note on using a variance decomposition to assess the quantitative importance of news shocks

Listed author(s):
  • Sims, Eric

This paper points out a conceptual difficulty in using a variance decomposition to assess the quantitative importance of news shocks. A variance decomposition will attribute to news shocks movements in endogenous variables driven both by news about future exogenous fundamentals that has yet to materialize (what I call “pure news”) as well as movements driven by realized changes in fundamentals that were anticipated in the past (what I call “realized news”). I present a stylized model in which news about yet unrealized changes in fundamentals is irrelevant for output dynamics, but in which a variance decomposition may nevertheless attribute a large share of the variance of output to news shocks. I then revisit the quantitative importance of news in the model of Schmitt-Grohe and Uribe (2012). In their model news shocks account for 40 percent of the variance of output growth, but this is mostly driven by realized news.

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File URL: http://www.sciencedirect.com/science/article/pii/S0165188915301044
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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 73 (2016)
Issue (Month): C ()
Pages: 41-60

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Handle: RePEc:eee:dyncon:v:73:y:2016:i:c:p:41-60
DOI: 10.1016/j.jedc.2016.09.005
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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