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News Shocks under Financial Frictions

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  • Christoph Gortz

    (University of Birmingham)

  • John Tsoukalas

    (University of Glasgow)

  • Francesco Zanetti

    (University of Oxford)

Abstract

We examine the dynamic effects and empirical role of TFP news shocks in the context of frictions in financial markets. We document two new facts using VAR methods. First, a (positive) shock to future TFP generates a significant decline in various credit spread indicators considered in the macro-finance literature. The decline in the credit spread indicators is associated with a robust improvement in credit supply indicators, along with a broad based expansion in economic activity. Second, VAR methods also establish a tight link between TFP news shocks and shocks that explain the majority of un-forecastable movements in credit spread indicators. These two facts provide robust evidence on the importance of movements in credit spreads for the propagation of news shocks. A DSGE model enriched with a financial sector generates very similar quantitative dynamics and shows that strong linkages between leveraged equity and excess premiums, which vary inversely with balance sheet conditions, are critical for the amplification of TFP news shocks. The consistent assessment from both methodologies provides support for the traditional 'news view' of aggregate fluctuations.

Suggested Citation

  • Christoph Gortz & John Tsoukalas & Francesco Zanetti, 2021. "News Shocks under Financial Frictions," Discussion Papers 21-08, Department of Economics, University of Birmingham.
  • Handle: RePEc:bir:birmec:21-08
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    3. Miranda-Agrippino, Silvia & Hacıoglu Hoke, Sinem, 2018. "When creativity strikes: news shocks and business cycle fluctuations," LSE Research Online Documents on Economics 90381, London School of Economics and Political Science, LSE Library.
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    9. Christoph Görtz & Christopher Gunn & Thomas Lubik, 2018. "Taking Stock of TFP News Shocks: The Inventory Comovement Puzzle," Carleton Economic Papers 18-05, Carleton University, Department of Economics, revised 14 Jul 2018.
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    More about this item

    Keywords

    TFP News shocks; Business cycles; DSGE; VAR; Bayesian estimation;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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