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The Quantitative Importance of News Shocks in Estimated DSGE Models

We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and both unanticipated and news shocks, using quarterly US data from 1954-2004 and Bayesian methods. We find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output, consumption, and investment growth, interest rate, and the relative price of investment. The unanticipated shock to the marginal eficiency of investment is the dominant shock, accounting for over 45% of the variance in output growth. News shocks account for less than 15% of the variance in output growth. Within the set of news shocks, non-technology sources of news dominate technology news, with wage markup news shocks accounting for about 60% of the variance share of both hours and ination. We find that in the estimated DSGE model (a) the presence of endogenous countercyclical price and wage markups due tonominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions, and (b) while there is little change in the estimated contributions of technology news when we restrict wealth effects on labour supply, the contributions of non-technology news shocks are relatively more sensitive.

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File URL: http://onlinelibrary.wiley.com/doi/10.1111/j.1538-4616.2012.00543.x/pdf
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Paper provided by Carleton University, Department of Economics in its series Carleton Economic Papers with number 09-07.

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Length: 48 pages
Date of creation: 22 Sep 2009
Date of revision: 22 May 2012
Publication status: Published: Revised version in Journal of Money, Credit and Banking, Vol. 44, No. 8 (December 2012), pp. 1535–1561
Handle: RePEc:car:carecp:09-07
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  1. Jesús Fernández-Villaverde, 2010. "The econometrics of DSGE models," SERIEs, Spanish Economic Association, vol. 1(1), pages 3-49, March.
  2. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2011. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(1), pages 1-29, 02.
  3. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
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  7. Justiniano, Alejandro & Primiceri, Giorgio E & Tambalotti, Andrea, 2008. "Investment Shocks and Business Cycles," CEPR Discussion Papers 6739, C.E.P.R. Discussion Papers.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  9. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
  10. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
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  12. John Geweke, 1998. "Using simulation methods for Bayesian econometric models: inference, development, and communication," Staff Report 249, Federal Reserve Bank of Minneapolis.
  13. Beaudry, Paul & Portier, Franck, 2003. "Stock Prices, News and Economic Fluctuations," CEPR Discussion Papers 3844, C.E.P.R. Discussion Papers.
  14. Khan, Hashmat & Tsoukalas, John, 2011. "Investment shocks and the comovement problem," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 115-130, January.
  15. Nir Jaimovich & Sergio Rebelo, 2006. "Can News About the Future Drive the Business Cycle?," NBER Working Papers 12537, National Bureau of Economic Research, Inc.
  16. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices 09-191, Review of Economic Dynamics.
  17. Michelle Alexopoulos, 2010. "Read All About it!! What happens following a technology shock?," Working Papers tecipa-391, University of Toronto, Department of Economics.
  18. Greenwood, Jeremy & Hercowitz, Zvi & Huffman, Gregory W, 1988. "Investment, Capacity Utilization, and the Real Business Cycle," American Economic Review, American Economic Association, vol. 78(3), pages 402-17, June.
  19. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
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