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No News in Business Cycles

Listed author(s):
  • Mario Forni
  • Luca Gambetti
  • Luca Sala

A structural Factor-Augmented VAR model is used to evaluate the role of "news" shocks in generating the business cycle. We find that (i) existing small-scale VAR models are affected by "non-fundamentalness" and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a smaller role in explaining the business cycle than previously found in the literature; (iii) their effects are essentially in line with what predicted by standard theories; (iv) a substantial fraction of business cycle fluctuations are explained by shocks unrelated to technology. JEL classification: C32, E32, E62. Keywords: Factor-augmented VAR, news shocks, invertibility, fundamentalness.

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Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 491.

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Date of creation: 2013
Handle: RePEc:igi:igierp:491
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