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Information Flows and News Driven Business Cycles

  • Eric Leeper

    (Indiana University)

  • Todd Walker

    (Indiana University)

How do information flows influence business cycle dynamics in models with anticipated (news shocks) and unanticipated innovations? To address this question, we show how alternative specifications of news affect the equilibrium by deriving the mapping between news shocks and the endogenous variables in a simple analytical model. News shocks are shown to add moving average (MA) components to endogenous variables. We then show how the additional MA components affect equilibrium dynamics. We generalize two popular forms of news processes to demonstrate how information flows impact equilibrium dynamics. To compare these news processes, we establish conditions under which the two processes have identical information content. We find that allowing news shocks to be correlated across time generates hump-shaped impulse response functions and helps mitigate the comovement problem. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2010.08.003
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 14 (2011)
Issue (Month): 1 (January)
Pages: 55-71

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Handle: RePEc:red:issued:09-244
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