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News and policy foresight in a macro-finance model of the US

  • Badarinza, Cristian
  • Margaritov, Emil
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    We study the effects of information shocks on macroeconomic and term structure dynamics in an estimated medium-scale DSGE model for the US economy. We consider news about total factor productivity and investment-specific technology, as well as foresight about monetary policy. Our empirical investigation confirms the findings of previous studies on the limited role played by productivity news in this class of models. In contrast, we uncover a non-trivial role for investment-specific news and anticipated monetary policy shocks not only in the historical and variance decomposition of real economic variables but also for the overall dynamic behavior of the term structure of interest rates. We also document substantial qualitative differences in the dynamic responses of the macroeconomy and the bond yield term structure to anticipated and surprise structural and policy innovations. JEL Classification: E32, E43, E52

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    Paper provided by European Central Bank in its series Working Paper Series with number 1313.

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    Date of creation: Mar 2011
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    Handle: RePEc:ecb:ecbwps:20111313
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    1. Lemke, Wolfgang, 2008. "An affine macro-finance term structure model for the euro area," The North American Journal of Economics and Finance, Elsevier, vol. 19(1), pages 41-69, March.
    2. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," IMES Discussion Paper Series 08-E-16, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Andrew Ang & Monika Piazzesi, 2001. "A No-Arbitrage Vector Autoregression of Term Structure Dynamics with Macroeconomic and Latent Variables," NBER Working Papers 8363, National Bureau of Economic Research, Inc.
    4. Fabio Milani & John Treadwell, 2011. "The Effects of Monetary Policy "News" and "Surprises"," Working Papers 101109, University of California-Irvine, Department of Economics.
    5. André Kurmann & Christopher Otrok, 2012. "News shocks and the slope of the term structure of interest rates," Working Papers 2012-011, Federal Reserve Bank of St. Louis.
    6. De Graeve, Ferre & Emiris, Marina & Wouters, Raf, 2009. "A structural decomposition of the US yield curve," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 545-559, May.
    7. Volker Wieland & Maik Wolters, 2011. "The diversity of forecasts from macroeconomic models of the US economy," Economic Theory, Springer, vol. 47(2), pages 247-292, June.
    8. Guido Lorenzoni, 2007. "News Shocks and Optimal Monetary Policy," NBER Working Papers 12898, National Bureau of Economic Research, Inc.
    9. Geert Bekaert & Seonghoon Cho & Antonio Moreno, 2005. "New-Keynesian Macroeconomics and the Term Structure," NBER Working Papers 11340, National Bureau of Economic Research, Inc.
    10. Hashmat Khan & John Tsoukalas, 2009. "The Quantitative Importance of News Shocks in Estimated DSGE Models," Carleton Economic Papers 09-07, Carleton University, Department of Economics, revised 22 May 2012.
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