News, Noise, and Fluctuations: An Empirical Exploration

41 Pages Posted: 1 Jun 2009  

Olivier J. Blanchard

National Bureau of Economic Research (NBER); Peter G. Peterson Institute for International Economics

Jean-Paul L'Huillier

Massachusetts Institute of Technology (MIT)

Guido Lorenzoni

Northwestern University; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: May 2009

Abstract

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.

Suggested Citation

Blanchard, Olivier J. and L'Huillier, Jean-Paul and Lorenzoni, Guido, News, Noise, and Fluctuations: An Empirical Exploration (May 2009). NBER Working Paper No. w15015. Available at SSRN: https://ssrn.com/abstract=1412047

Olivier J. Blanchard (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Peter G. Peterson Institute for International Economics ( email )

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Jean-Paul L'Huillier

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
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Cambridge, MA 02139-4307
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Guido Lorenzoni

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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