Noisy News in Business Cycles

43 Pages Posted: 20 Aug 2013

See all articles by Mario Forni

Mario Forni

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

Luca Gambetti

Universitat Autonoma de Barcelona

Marco Lippi

Dipartimento di Scienze Economiche (DiSSE); Einaudi Institute for Economics and Finance (EIEF)

Luca Sala

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

Date Written: August 2013

Abstract

In a situation where agents can only observe a noisy signal of the shock to future economic fundamentals, SVAR models can still be successfully employed to estimate the shock and the associated impulse response functions. Identification is reached by means of dynamic rotations of the reduced form residuals. We use our identification approach to investigate the role of the "noise" shock the component of the signal observed by agents which is unrelated to economic fundamentals as a source of business cycle fluctuations. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for about a third of their prediction error variance at business cycle horizons.

Keywords: Business cycle, Imperfect information, News, Noise, Nonfundamentalness, SVAR

JEL Classification: C32, E32, E62

Suggested Citation

Forni, Mario and Gambetti, Luca and Lippi, Marco and Sala, Luca, Noisy News in Business Cycles (August 2013). CEPR Discussion Paper No. DP9601. Available at SSRN: https://ssrn.com/abstract=2312976

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

Marco Lippi

Dipartimento di Scienze Economiche (DiSSE) ( email )

14 Via Cesalpino
Rome, 00161
Italy
+39 06 4428 4202 (Phone)
+39 06 4404 572 (Fax)

Einaudi Institute for Economics and Finance (EIEF) ( email )

Via Due Macelli, 73
Rome, 00187
Italy

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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