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Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach

  • Ippei Fujiwara

    (Institute for Monetary and Economic Studies, Bank of Japan (E-mail: ippei.fujiwara@boj.or.jp))

  • Yasuo Hirose

    (Economist, International Department, Bank of Japan (E-mail: yasuo.hirose@boj.or.jp))

  • Mototsugu Shintani

    (Associate Professor, Department of Economics, Vanderbilt University, and Economist, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: mototsugu.shintani@vanderbilt.edu, mototsugu.shintani@boj.or.jp))

We examine whether the news shocks, as explored in Beaudry and Portier (2004), can be a major source of aggregate fluctuations. For this purpose, we extend a dynamic stochastic general equilibrium model, a la Christiano, Eichenbaum, and Evans (2005), by allowing news shocks on the total factor productivity and estimate the model using Bayesian methods. Estimation results on the Japanese and U.S. economies show that (1) the news shocks play an important role in business cycles; (2) a news shock with a longer forecast horizon has larger effects on nominal variables; and (3) the overall effect of the total factor productivity on hours worked becomes ambiguous in the presence of news shocks.

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Paper provided by Institute for Monetary and Economic Studies, Bank of Japan in its series IMES Discussion Paper Series with number 08-E-16.

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Date of creation: Jul 2008
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Handle: RePEc:ime:imedps:08-e-16
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  1. Beaudry, Paul & Portier, Franck, 2005. "The "news view" of economic fluctuations: Evidence from aggregate Japanese data and sectoral US data," Journal of the Japanese and International Economies, Elsevier, vol. 19(4), pages 635-652, December.
  2. KOBAYASHI Keiichiro & NAKAJIMA Tomoyuki & INABA Masaru, 2007. "Collateral Constraint and News-driven Cycles," Discussion papers 07013, Research Institute of Economy, Trade and Industry (RIETI).
  3. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  4. Paul Beaudry & Franck Portier, 2004. "Stock Prices, News and Economic Fluctuations," NBER Chapters, in: Enhancing Productivity (NBER-CEPR-TCER-Keio conference) National Bureau of Economic Research, Inc.
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  8. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393 Elsevier.
  9. Smets, Frank & Wouters, Raf, 2007. "Shocks and frictions in US business cycles: a Bayesian DSGE approach," Working Paper Series 0722, European Central Bank.
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  11. Ramey, Valerie A & Francis, Neville, 2002. "Is The Technology-Driven Real Business Cycle Hypothesis Dead? Shocks and Aggregate Fluctuations Revisted," University of California at San Diego, Economics Working Paper Series qt6x80k3nx, Department of Economics, UC San Diego.
  12. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
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  19. Gali, J., 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," Working Papers 96-28, C.V. Starr Center for Applied Economics, New York University.
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  21. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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  24. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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  27. Sugo, Tomohiro & Ueda, Kozo, 2008. "Estimating a dynamic stochastic general equilibrium model for Japan," Journal of the Japanese and International Economies, Elsevier, vol. 22(4), pages 476-502, December.
  28. Ippei Fujiwara & Heedon Kang, 2006. "Expectation Shock Simulation with DYNARE," QM&RBC Codes 163, Quantitative Macroeconomics & Real Business Cycles, revised Feb 2008.
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  32. Ippei Fujiwara, 2008. "Growth Expectation," IMES Discussion Paper Series 08-E-21, Institute for Monetary and Economic Studies, Bank of Japan.
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