No News in Business Cycles
41 Pages Posted: 13 Oct 2012
Date Written: October 2012
A structural, large dimensional factor model is used 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 VAR 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) a substantial fraction of business cycle uctuations are explained by shocks unrelated to technology.
Keywords: structural factor model, news shocks, invertibility, fundamentalness
JEL Classification: C32, E32, E62
Suggested Citation: Suggested Citation