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Noisy News in Business Cycles†

Noisy News in Business Cycles† AbstractWe investigate the role of “noise” shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced-form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment, and account for a sizable fraction of their prediction error variance at business cycle horizons. (JEL C32, D83, E12, E23, E32, E43) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

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Publisher
American Economic Association
Copyright
Copyright © 2017 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20150359
Publisher site
See Article on Publisher Site

Abstract

AbstractWe investigate the role of “noise” shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced-form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment, and account for a sizable fraction of their prediction error variance at business cycle horizons. (JEL C32, D83, E12, E23, E32, E43)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Oct 1, 2017

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