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A Note on Information Flows and Identification of News Shocks Models

  • Marco M. Sorge

This note points out a hitherto unrecognised identification issue in a class of rational expectations (RE) models with news shocks. We show that different degrees of anticipation (information flows) have strikingly different implications for the identifiability of the underlying structural model, irrespective of its non-fundamental time-series representation. In particular, under full shock anticipation equilibrium reduced forms behave as noisy perfect foresight state motions, which are non-identifiable. As a consequence, the underlying news shocks model fails to be (first-order) identified. The identification failure is illustrated with a New Keynesian model that can be solved analytically.

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Paper provided by Economics and Econometrics Research Institute (EERI), Brussels in its series EERI Research Paper Series with number EERI RP 2013/08.

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Date of creation: 08 Apr 2013
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Handle: RePEc:eei:rpaper:eeri_rp_2013_08
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  1. Eric Leeper & Todd Walker, 2011. "Information Flows and News Driven Business Cycles," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(1), pages 55-71, January.
  2. Laurence Broze & Ariane Szafarz, 1991. "The Econometric Analysis of Non-Uniqueness in Rational Expectations Models," ULB Institutional Repository 2013/649, ULB -- Universite Libre de Bruxelles.
  3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," NBER Working Papers 8290, National Bureau of Economic Research, Inc.
  4. Ippei Fujiwara & Yasuo Hirose & Mototsugu Shintani, 2008. "Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach," Levine's Working Paper Archive 122247000000002352, David K. Levine.
  5. Paul Beaudry & Franck Portier, 2004. "When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings?," NBER Working Papers 10776, National Bureau of Economic Research, Inc.
  6. Fève, Patrick & Matheron, Julien & Sahuc, Jean-Guillaume, 2009. "On the dynamic implications of news shocks," Economics Letters, Elsevier, vol. 102(2), pages 96-98, February.
  7. Marco M. Sorge, 2013. "A Note on Information Flows and Identification of News Shocks Models," Journal of Economics and Econometrics, Economics and Econometrics Society, vol. 56(1), pages 28-38.
  8. Evans, George & Honkapohja, Seppo, 1986. "A Complete Characterization of ARMA Solutions to Linear Rational Expectations Models," Review of Economic Studies, Wiley Blackwell, vol. 53(2), pages 227-39, April.
  9. McCallum, Bennett T & Nelson, Edward, 2001. "Timeless Perspective Vs Discretionary Monetary Policy in Forward-Looking Models," CEPR Discussion Papers 2752, C.E.P.R. Discussion Papers.
  10. Fève, Patrick & Jidoud, Ahmat, 2012. "Identifying News Shocks from SVARs," IDEI Working Papers 706, Institut d'Économie Industrielle (IDEI), Toulouse.
  11. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, vol. 16(3), pages 375-398, August.
  12. Aoki, Masanao & Canzoneri, Matthew, 1979. "Reduced Forms of Rational Expectations Models," The Quarterly Journal of Economics, MIT Press, vol. 93(1), pages 59-71, February.
  13. Broze, L. & Szafarz, A., 1984. "On linear models with rational expectations which admit a unique solution," European Economic Review, Elsevier, vol. 24(1), pages 103-111.
  14. Eric M. Leeper & Todd B. Walker & Shu-Chun Susan Yang, 2008. "Fiscal Foresight: Analytics and Econometrics," Caepr Working Papers 2008-013, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  15. Sorge, Marco M., 2012. "News shocks or parametric indeterminacy? An observational equivalence result in linear rational expectations models," Economics Letters, Elsevier, vol. 114(2), pages 198-200.
  16. Wegge, Leon L. & Feldman, Mark, 1983. "Identifiability criteria for Muth-rational expectations models," Journal of Econometrics, Elsevier, vol. 21(2), pages 245-254, February.
  17. Beaudry, Paul & Portier, Franck, 2004. "An exploration into Pigou's theory of cycles," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1183-1216, September.
  18. Barsky, Robert B. & Sims, Eric R., 2011. "News shocks and business cycles," Journal of Monetary Economics, Elsevier, vol. 58(3), pages 273-289.
  19. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
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