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Shock persistence, uncertainty and news-driven business cycles

Author

Listed:
  • Kevin Lee
  • Kalvinder Shields
  • Guido Turnip

Abstract

This paper considers the macroeconomic effects of shocks with different persistence properties identified from surveys of expectations. Using a GARCH-in-Mean model for the US, we present persistence profiles to illustrate how news about events occurring over different time frames plays different roles in explaining output fluctuations in different circumstances. For example, short-lived ‘noise’ shocks have little influence on output beyond their contemporaneous impact, either directly or via the uncertainty they create. But agents recognise the importance of ‘fundamental’ permanent shocks and these drive the news-driven business cycle, generating immediate stock price reactions and gradually building output effects but also having more immediate effects on output during recessions because of the uncertainties they create.

Suggested Citation

  • Kevin Lee & Kalvinder Shields & Guido Turnip, 2022. "Shock persistence, uncertainty and news-driven business cycles," CAMA Working Papers 2022-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2022-34
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    File URL: https://cama.crawford.anu.edu.au/sites/default/files/publication/cama_crawford_anu_edu_au/2022-05/34_2022_lee_shields_turnip.pdf
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    More about this item

    Keywords

    News-Driven Business Cycles; Persistence; Uncertainty; Expectations; Surveys;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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