Whither News Shocks?

57 Pages Posted: 10 Nov 2014

See all articles by robert barsky

robert barsky

affiliation not provided to SSRN

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics; National Bureau of Economic Research (NBER)

Robert Barsky

Research Department, Federal Reserve Bank of Chicago; University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Keyoung Lee

University of California, Los Angeles (UCLA)

Date Written: November 2014

Abstract

Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where “news” is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent – possibly lending some support to the hypothesis of news-driven business cycles – or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.

Suggested Citation

barsky, robert and Basu, Susanto and Barsky, Robert B. and Lee, Keyoung, Whither News Shocks? (November 2014). NBER Working Paper No. w20666, Available at SSRN: https://ssrn.com/abstract=2521424

Robert Barsky (Contact Author)

affiliation not provided to SSRN

Susanto Basu

Boston College, College of Arts and Sciences, Department of Economics ( email )

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Chestnut Hill, MA 02467-3806
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National Bureau of Economic Research (NBER) ( email )

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Robert B. Barsky

Research Department, Federal Reserve Bank of Chicago ( email )

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University of Michigan at Ann Arbor - Department of Economics ( email )

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United States
734-764-9476 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Keyoung Lee

University of California, Los Angeles (UCLA) ( email )

405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States

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