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News shocks and business cycles

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  • Barsky, Robert B.
  • Sims, Eric R.

Abstract

This paper proposes and implements a novel structural VAR approach to the identification of news shocks about future technology. The news shock is identified as the shock orthogonal to the innovation in current utilization-adjusted TFP that best explains variation in future TFP. A favorable news shock leads to an increase in consumption and decreases in output, hours, and investment on impact – more suggestive of standard DSGE models than of recent extensions designed to generate news-driven business cycles. Though news shocks account for a significant fraction of output fluctuations at medium frequencies, they contribute little to our understanding of recessions.

Suggested Citation

  • Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
  • Handle: RePEc:eee:moneco:v:58:y:2011:i:3:p:273-289
    DOI: 10.1016/j.jmoneco.2011.03.001
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