Can News about the Future Drive the Business Cycle?

2016

When both Investment-Specific Technology (IST) news and Total Factor Productivity (TFP) news shocks compete, the former substantially dominate the latter in driving post-WWII US business cycles. At the two-year horizon, IST news shocks account for 58 percent of the forecast error variance in output, 56 percent of the variation in hours, 51 percent of investment, and 65 percent of consumption variation. By contrast, TFP news shocks account for less than 10 percent of the variation in output, hours, investment, and consumption. TFP news also fails to produce comovement and statistically significant effects on macroeconomic variables despite using the most recent vintage of TFP data from Fernald (2014). Our findings suggest shifting focus from TFP to IST news when studying news-driven business cycles.

2009

There has been recent interest in the implications of expectations about changes in future fundamentals for the business cycle. This dissertation is broadly concerned with the identifcation and study of so-called" news shocks" about future productivity. The effects of news shocks shed light on several macroeconomic phenomena. Chapter II proposes and implements a new approach for the empirical identificcation of news shocks.

The B.E. Journal of Macroeconomics, 2012

Overly optimistic expectations concerning productivity and consequent downward revisions are commonly viewed as a key determinant of U.S. investment during the boom-bust cycle of 1995-2003. This view is formalized and evaluated in a general equilibrium model with news shocks about future productivity and preferences for financial wealth. The model generates a boom-bust cycle in response to good news that is not realized. A method is devised to estimate "the productivity prospects": a series that captures the effects of news shocks on economic decisions. The estimated series rises during the boom, falls during the recession and helps forecast future productivity shocks at several horizons. The model's predictions for sample paths of hours worked, output, investment, consumption, wages and stock prices are largely in conformity with U.S. data. The model therefore offers a possible solution to several puzzles identified in the literature regarding the 1990's boom and the 2001 recession.

Journal of Economic Dynamics and Control, 2011

Recent work based on sticky price-wage estimated dynamic stochastic general equilibrium (DSGE) models suggests investment shocks are the most important drivers of post-World War II US business cycles. Consumption, however, typically falls after an investment shock. This finding sits oddly with the observed business cycle comovement where consumption, along with hours-worked and investment, moves with economic activity. We show that this comovement problem is resolved in an estimated DSGE model when (i) the cost of capital utilization is specified in terms of increased depreciation of capital, as originally proposed by Greenwood et al. (1988) in a neoclassical setting, or (ii) there is no wealth effect on labor supply. The data, however, favours the first channel. Traditionally, the cost of utilization is specified in terms of forgone consumption following Christiano et al. (2005), who studied the effects of monetary policy shocks. The alternative specification we consider has two additional implications relative to the traditional one: (i) it has a substantially better fit with the data and (ii) the contribution of investment shocks to the variance of consumption is over three times larger. The contributions to output, investment, and hours, are also relatively higher, suggesting that these shocks may be quantitatively even more important than previous estimates based on the traditional specification.

2016

A signicant challenge faced by the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between dierentVAR and DSGEmethodologies over the empirical plausibility of this view. We show that VAR and DSGE methodologies provide a broadly consistent assessment of the empirical relevance of news shocks once we augment a standard DSGE model with a nancial channel that provides amplication to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be signicant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies.chos Sakellaris for useful comments and suggestions. We thank seminar participants at American Economic Association (Boston 2015), Mid-West Macro Meeting (Missouri 2014), University of Dortmund, DIW Berlin and University of Manchester for helpful comments. We are grateful to...

2016

Recent empirical evidence identifies investment shocks as key driving forces behind business cycle fluctuations. However, existing New Keynesian models emphasizing these shocks counterfactually imply a negative unconditional correlation between consumption growth and investment growth, a weak positive unconditional correlation between consumption growth and output growth and anomalous profiles of cross-correlations involving consumption growth. These anomalies arise because of a short-run contractionary effect a positive investment shock on consumption. Such counterfactual co-movements are typical of the "Barro-King curse" (Barro and King 1984), wherein models with a real business cycle core must rely on technology shocks to account for the observed co-movement among output, consumption, investment, and hours. We show that two realistic additions to an otherwise standard medium scale New Keynesian model-namely, roundabout production and real per capita output growth stemming from trend growth in neutral and investment-specific technologies-can break the Barro-King curse and provide a more accurate account of unconditional business cycle comovements more generally. These two features substantially magnify the effects of neutral technology and investment shocks on aggregate fluctuations and generate a rise of consumption on impact of a positive investment shock.

2013

A significant challenge faced by the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between different-VAR and DSGE-methodologies over the empirical plausibility of this view. We show that VAR and DSGE methodologies provide a broadly consistent assessment of the empirical relevance of news shocks once we augment a standard DSGE model with a financial channel that provides amplification to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be significant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies.

Journal of Monetary Economics, 2007

Synchronized expansions and contractions across sectors define business cycles. Yet synchronization is puzzling because productivity across sectors exhibits weak correlation. While previous work examined production complementarity, our analysis explores complementarity in information acquisition. Because information about future productivity has a high fixed cost of production and a low marginal cost of replication, sectors can share the cost to forecast their sector-specific productivity. Sectors with common, aggregate information make highly correlated productions choices. By filtering out sector-specific shocks and transmitting aggregate ones, information markets amplify business-cycle comovement.

2016

We propose a simple real business cycle model to explain two of the most important aspects of macroeconomics: business cycle facts and the asset pricing mechanism. Based on US and Japanese quarterly data, we estimate the model with capital and labor adjustment costs. Our analysis reveals that this simple model can explain the key business cycle facts, even without other frictions such as sticky prices, sticky wages, and search and matching frictions. Furthermore, this simple model also has explanatory power for whether a stock price will increase or decrease. However, this feature of the model is weaker for the Great Recession in the US economy.

In this paper, I developed a standard neoclassical growth model to understand the importance of investment shock on business cycle fluctuation. In addition to investment shock, my model includes technology shock too. Using the Simulation-based PEA (Parameterized expectations algorithm) approach, i estimate the Model. The model provides evidence that investment shocks constitute a significant force behind U.S. business cycles. Model in this paper reaffirms the comovement of consumption and investment with output and accurately predicts the Investment to output,capital to output ratio and the labour for the US economy.

Journal of Monetary Economics, 2001

Although there has been substantial research using long-run co-movement (cointegration) restrictions in the empirical macroeconomics literature, little or no work has been done investigating the existence of short-run co-movement (common cycles) restrictions and discussing their implications. In this paper we first investigate the existence of common cycles in a aggregate data set comprising per-capita output, consumption, and investment. Later we discuss their usefulness in measuring the relative importance of transitory shocks. We show that, taking into account common-cycle restrictions, transitory shocks are more important than previously thought at businesscycle horizons. The central argument relies on efficiency gains from imposing these short-run restrictions on the estimation of the dynamic model. Finally, we discuss how the evidence here and elsewhere can be interpreted to support the view that nominal $ We gratefully acknowledge comments from Heather Anderson, Wouter den (J.V. Issler). 0304-3932/01/$ -see front matter r 2001 Elsevier Science B.V. All rights reserved. PII: S 0 3 0 4 -3 9 3 2 ( 0 1 ) 0 0 0 5 2 -6 shocks may be important in the short run. r

2007

In this paper, we show that news on future technological improvement can trigger an immediate economic expansion in a model with nancial friction on capital allocation. The arrivial of good news on future technology reduces such frictions and generates signi cant increase in current Total Factor Productivity via capital reallocation. This triggers an immediate boom in output, consumption, investment and hours worked. Our empirical evidence using rm-level data supports strongly the above mechanisms for news to a ect current aggregate productivity.