No News in Business Cycles

33 Pages Posted: 14 Mar 2011

See all articles by Mario Forni

Mario Forni

Università di Modena; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Autonoma de Barcelona

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Date Written: March 2011

Abstract

This paper uses a structural, large dimensional factor model to evaluate the role of 'news' shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by 'non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle fluctuations is explained by shocks unrelated to technology.

Keywords: fundamentalness, invertibility, news shocks, structural factor model

JEL Classification: C32, E32, E62

Suggested Citation

Forni, Mario and Gambetti, Luca and Sala, Luca, No News in Business Cycles (March 2011). CEPR Discussion Paper No. DP8274. Available at SSRN: https://ssrn.com/abstract=1782568

Mario Forni (Contact Author)

Università di Modena; Centre for Economic Policy Research (CEPR) ( email )

Luca Gambetti

Universitat Autonoma de Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)

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