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News and Financial Intermediation in Aggregate Fluctuations

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  • Görtz, Christoph
  • Tsoukalas, John

Abstract

We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s.

Suggested Citation

  • Görtz, Christoph & Tsoukalas, John, 2011. "News and Financial Intermediation in Aggregate Fluctuations," MPRA Paper 34113, University Library of Munich, Germany, revised Oct 2011.
  • Handle: RePEc:pra:mprapa:34113
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    Citations

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    Cited by:

    1. Paul Beaudry & Franck Portier, 2014. "News-Driven Business Cycles: Insights and Challenges," Journal of Economic Literature, American Economic Association, vol. 52(4), pages 993-1074, December.
    2. Stéphane Auray & Paul Gomme & Shen Guo, 2013. "Nominal Rigidities, Monetary Policy and Pigou Cycles," Economic Journal, Royal Economic Society, vol. 0, pages 455-473, May.
    3. repec:eee:dyncon:v:78:y:2017:i:c:p:164-189 is not listed on IDEAS
    4. 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.
    5. Konstantinos Theodoridis & Francesco Zanetti, 2016. "News shocks and labour market dynamics in matching models," Canadian Journal of Economics, Canadian Economics Association, vol. 49(3), pages 906-930, August.
    6. Gelain, Paolo & Ilbas, Pelin, 2017. "Monetary and macroprudential policies in an estimated model with financial intermediation," Journal of Economic Dynamics and Control, Elsevier, vol. 78(C), pages 164-189.
    7. Theodoridis, Konstantinos & Zanetti, Francesco, 2014. "News and labour market dynamics in the data and in matching models," Bank of England working papers 488, Bank of England.
    8. Tadeusz Klecha & Daniel Kosiorowski & Dominik Mielczarek & Jerzy P. Rydlewski, 2018. "New Proposals of a Stress Measure in a Capital and its Robust Estimator," Papers 1802.03756, arXiv.org.
    9. Alok Johri & Terry Yip, 2017. "Financial Shocks,Supply-chain Relationships and the Great Trade Collapse," Department of Economics Working Papers 2017-11, McMaster University.
    10. Christopher M. Gunn, 2014. "Overaccumulation, Interest, and Prices," Carleton Economic Papers 14-07, Carleton University, Department of Economics.

    More about this item

    Keywords

    News; Anticipation effects; Business cycles; DSGE; Bayesian estimation;

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

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