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News and Financial Intermediation in Aggregate and Sectoral Fluctuations

Listed author(s):
  • Christoph Gortz
  • John D Tsoukalas

We estimate a two-sector DSGE model with financial intermediaries - a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010) - and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bonds spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for importance and propagation of asset value news shocks.

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File URL: ftp://ftp.bham.ac.uk/pub/RePEc/pdf/12-10.pdf
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Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number 12-10.

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Length: 75 pages
Date of creation: Jul 2012
Handle: RePEc:bir:birmec:12-10
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Edgbaston, Birmingham, B15 2TT

Web page: http://www.economics.bham.ac.uk

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