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News, Noise, and Fluctuations: An Empirical Exploration

Listed author(s):
  • Jean-Paul L'Huillier

    (Einaudi Institute for Economics and Finance)

  • Guido Lorenzoni

    (MIT)

  • Olivier Blanchard

    (IMF)

We explore empirically models of aggregate fluctuations with two basic ingredients: agents form anticipations about the future based on noisy sources of information; these anticipations affect spending and output in the short run. Our objective is to separate fluctuations due to actual changes in fundamentals (news) from those due to temporary errors in the private sector's estimates of these fundamentals (noise). Using a simple model where the consumption random walk hypothesis holds exactly, we address some basic methodological issues and take a first pass at the data. First, we show that if the econometrician has no informational advantage over the agents in the model, structural VARs cannot be used to identify news and noise shocks. Next, we develop a structural Maximum Likelihood approach which allows us to identify the model's parameters and to evaluate the role of news and noise shocks. Applied to postwar U.S. data, this approach suggests that noise shocks play an important role in short-run fluctuations.

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File URL: https://economicdynamics.org/meetpapers/2011/paper_969.pdf
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Paper provided by Society for Economic Dynamics in its series 2011 Meeting Papers with number 969.

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Date of creation: 2011
Handle: RePEc:red:sed011:969
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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