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News shocks and business cycles

Author

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  • Per Krusell
  • Alisdair McKay

Abstract

This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables—consumption, investment, and employment—to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.

Suggested Citation

  • Per Krusell & Alisdair McKay, 2010. "News shocks and business cycles," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 373-397.
  • Handle: RePEc:fip:fedreq:y:2010:i:4q:p:373-397:n:v.96no.4
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    File URL: http://www.richmondfed.org/publications/research/economic_quarterly/2010/q4/pdf/krusell.pdf
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    References listed on IDEAS

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    1. Floden, Martin, 2006. "Vintage Capital and Expectations Driven Business Cycles," SSE/EFI Working Paper Series in Economics and Finance 643, Stockholm School of Economics.
    2. Jesús Fernández-Villaverde & Juan F. Rubio-Ramírez & Thomas J. Sargent & Mark W. Watson, 2007. "ABCs (and Ds) of Understanding VARs," American Economic Review, American Economic Association, vol. 97(3), pages 1021-1026, June.
    3. Walentin, Karl, 2014. "Expectation driven business cycles with limited enforcement," Economics Letters, Elsevier, vol. 124(2), pages 300-303.
    4. Beaudry, Paul & Portier, Franck, 2007. "When can changes in expectations cause business cycle fluctuations in neo-classical settings?," Journal of Economic Theory, Elsevier, vol. 135(1), pages 458-477, July.
    5. Christopher A. Pissarides, 2000. "Equilibrium Unemployment Theory, 2nd Edition," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262161877, January.
    Full references (including those not matched with items on IDEAS)

    Citations

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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.
    2. Sandra Gomes & Caterina Mendicino, 2011. "Housing Market Dynamics: Any News?," Working Papers w201121, Banco de Portugal, Economics and Research Department.
    3. Große Steffen, Christoph, 2015. "Uncertainty shocks and non-fundamental debt crises: An ambiguity approach," Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 112936, Verein für Socialpolitik / German Economic Association.
    4. repec:eee:joepsy:v:63:y:2017:i:c:p:1-16 is not listed on IDEAS
    5. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 103-155.

    More about this item

    Keywords

    Business cycles ; Economic growth;

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