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News shocks and business cycles: bridging the gap from different methodologies

  • Christoph Görtz
  • John D. Tsoukalas

An important disconnect in the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between different—VAR and DSGE—methodologies over the empirical plausibility of this view. We argue that this disconnect can be largely resolved once we augment a standard DSGE model with a financial channel that provides amplification to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be significant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies.

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Paper provided by Business School - Economics, University of Glasgow in its series Working Papers with number 2013_25.

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Date of creation: Nov 2013
Date of revision:
Handle: RePEc:gla:glaewp:2013_25
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