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Identifying News Shocks from SVARs

  • Féve, Patrick
  • Jidoud, Ahmat

This paper investigates the reliability of SVARs in identifying the dynamic effects of news shocks. Using a simple but insightful model with a non-fundamental representation, we show analytically under which conditions SVARs are likely to be successful at identifying news shocks. We find that the dynamic responses to news shocks identified using a short-run restriction are biased. However, this bias is smaller if news shocks account for most of the variability of the endogenous variable and the economy exhibits strong forward-looking behavior. Our simulation experiments confirm this finding and further suggest that the number of lags in the VAR and the anticipation horizon are key ingredients for the success of the VAR setup.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 34 (2012)
Issue (Month): 4 ()
Pages: 919-932

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Handle: RePEc:eee:jmacro:v:34:y:2012:i:4:p:919-932
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Staff Report 364, Federal Reserve Bank of Minneapolis.
  2. Todd B. Walker & Eric M. Leeper & Shu-Chun S. Yang, 2012. "Fiscal Foresight and Information Flows," IMF Working Papers 12/153, International Monetary Fund.
  3. Eric R. Sims, 2012. "News, Non-Invertibility, and Structural VARs," Working Papers 013, University of Notre Dame, Department of Economics, revised Jun 2012.
  4. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Working Papers 10548, National Bureau of Economic Research, Inc.
  5. Schmitt-Grohé, Stephanie & Uribe, Martín, 2009. "What’s News in Business Cycles," CEPR Discussion Papers 7201, C.E.P.R. Discussion Papers.
  6. Karel Mertens & Morten Overgaard Ravn, 2011. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 27-54, January.
  7. Valerie A. Ramey, 2009. "Identifying Government Spending Shocks: It's All in the Timing," NBER Working Papers 15464, National Bureau of Economic Research, Inc.
  8. Karel Mertens & MortenO. Ravn, 2010. "Measuring the Impact of Fiscal Policy in the Face of Anticipation: A Structural VAR Approach," Economic Journal, Royal Economic Society, vol. 120(544), pages 393-413, 05.
  9. Paul Beaudry & Franck Portier, 2005. "The "News" View of Economic Fluctuations: Evidence from Aggregate Japanese Data and Sectoral U.S. Data," NBER Working Papers 11496, National Bureau of Economic Research, Inc.
  10. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "On the dynamic implications of news shocks," Economics Letters, Elsevier, vol. 102(2), pages 96-98, February.
  11. Federico Ravenna, 2006. "Vector autoregressions and reduced form representations of DSGE models," Banco de Espa�a Working Papers 0619, Banco de Espa�a.
  12. Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2011. "Non‐Fundamentalness in Structural Econometric Models: A Review," International Statistical Review, International Statistical Institute, vol. 79(1), pages 16-47, 04.
  13. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Levine's Working Paper Archive 122247000000002352, David K. Levine.
  14. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
  15. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  16. Hashmat Khan & John Tsoukalas, 2009. "The Quantitative Importance of News Shocks in Estimated DSGE Models," Carleton Economic Papers 09-07, Carleton University, Department of Economics, revised 22 May 2012.
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