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Abstract An important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks. Findings from estimated DSGE models that… Click to show full abstract
Abstract An important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks. Findings from estimated DSGE models that in theory allow news shocks to matter quantitatively suggest that they do not. This disconnect can be resolved once we augment a DSGE model with a financial channel that provides amplification to news shocks. Our results suggest that news shocks to the future growth prospects of the economy are significant drivers of U.S. fluctuations, explaining as much as 50% and 37% of the variance in hours worked and output, respectively, in cyclical frequencies.
Journal Title: Review of Economics and Statistics
Year Published: 2017
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