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Whither News Shocks?

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  • Robert B. Barsky
  • Susanto Basu
  • Keyoung Lee

Abstract

Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where “news” is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent – possibly lending some support to the hypothesis of news-driven business cycles – or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.

Suggested Citation

  • Robert B. Barsky & Susanto Basu & Keyoung Lee, 2014. "Whither News Shocks?," NBER Working Papers 20666, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:20666
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    Citations

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    Cited by:

    1. Ryan Chahrour & Kyle Jurado, 2018. "News or Noise? The Missing Link," American Economic Review, American Economic Association, vol. 108(7), pages 1702-1736, July.
    2. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, Elsevier.
    3. Luca Gambetti & Dimitris Korobilis & John D. Tsoukalas & Francesco Zanetti, 2017. "The Effect of News Shocks and Monetary Policy," BCAM Working Papers 1705, Birkbeck Centre for Applied Macroeconomics.
    4. Rabah Arezki & Valerie A. Ramey & Liugang Sheng, 2017. "News Shocks in Open Economies: Evidence from Giant Oil Discoveries," The Quarterly Journal of Economics, Oxford University Press, vol. 132(1), pages 103-155.
    5. D'Amico, Stefania & King, Thomas B., 2015. "What Does Anticipated Monetary Policy Do?," Working Paper Series WP-2015-10, Federal Reserve Bank of Chicago.
    6. Sims, Eric, 2016. "What׳s news in News? A cautionary note on using a variance decomposition to assess the quantitative importance of news shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 41-60.
    7. Danilo Cascaldi-Garcia, 2017. "News Shocks and the Slope of the Term Structure of Interest Rates: Comment," American Economic Review, American Economic Association, vol. 107(10), pages 3243-3249, October.
    8. Langer, Viktoria C.E., 2016. "News shocks, nonseparable preferences, and optimal monetary policy," Journal of Macroeconomics, Elsevier, vol. 49(C), pages 237-246.
    9. Danilo Cascaldi-Garcia, 2017. "Amplification effects of news shocks through uncertainty," 2017 Papers pca1251, Job Market Papers.
    10. Nelimarkka, Jaakko, 2017. "Evidence on News Shocks under Information Deficiency," MPRA Paper 80850, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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