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Noisy News in Business Cycles

  • Mario Forni

    ()

  • Luca Gambetti

    ()

  • Marco Lippi

    ()

  • Luca Sala

    ()

The contribution of the present paper is twofold. First, we show that in a situation where agents can only observe a noisy signal of the shock to future economic fundamentals, the "noisy news", SVAR models can still be successfully employed to estimate the shock and the associated impulse response functions. Identification is reached by means of dynamic rotations of the reduced form residuals. Second, we use our identification approach to investigate the role of noise and news as sources of business cycle fluctuations. We find that noise shocks, the component of the signal unrelated to economic fundamentals, generate hump-shaped responses of GDP, consumption and investment and account for a third of their variance. Moreover, news and noise together account for more than half of the fluctuations in GDP, consumption and investment

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Paper provided by University of Modena and Reggio E., Dept. of Economics "Marco Biagi" in its series Center for Economic Research (RECent) with number 097.

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Length: pages 39
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:mod:recent:097
Contact details of provider: Web page: http://www.recent.unimore.it/

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  3. Den Haan, Wouter J. & Kaltenbrunner, Georg, 2009. "Anticipated growth and business cycles in matching models," Journal of Monetary Economics, Elsevier, vol. 56(3), pages 309-327, April.
  4. George-Marios Angeletos & Jennifer La'O, 2009. "Noisy Business Cycles," NBER Working Papers 14982, National Bureau of Economic Research, Inc.
    • George-Marios Angeletos & Jennifer La'O, 2010. "Noisy Business Cycles," NBER Chapters, in: NBER Macroeconomics Annual 2009, Volume 24, pages 319-378 National Bureau of Economic Research, Inc.
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  9. Jean-Paul L'Huillier & Guido Lorenzoni & Olivier J. Blanchard, 2009. "News, Noise and Fluctuations: An Empirical Exploration," 2009 Meeting Papers 99, Society for Economic Dynamics.
  10. Marco Lippi & Lucrezia Reichlin, 1993. "The dynamic effects of aggregate demand and supply disturbances: comment," ULB Institutional Repository 2013/10159, ULB -- Universite Libre de Bruxelles.
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  14. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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  16. Guido Lorenzoni, 2006. "A Theory of Demand Shocks," NBER Working Papers 12477, National Bureau of Economic Research, Inc.
  17. Guido Lorenzoni, 2010. "Optimal Monetary Policy with Uncertain Fundamentals and Dispersed Information ," Review of Economic Studies, Oxford University Press, vol. 77(1), pages 305-338.
  18. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  19. Marco Lippi & Lucrezia Reichlin, 1994. "VAR analysis, non-fundamental representations, Blashke matrices," ULB Institutional Repository 2013/10151, ULB -- Universite Libre de Bruxelles.
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