Noisy News in Business Cycles

Forni, Mario; Gambetti, Luca; Lippi, Marco; Sala, Luca

doi:10.2139/ssrn.2527926

Noisy News in Business Cycles

Baffi Center Research Paper No. 2014-159

45 Pages Posted: 20 Nov 2014

See all articles by Mario Forni

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

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: November 2014

Abstract

We investigate the role of "noise" shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for quite a sizable fraction of their prediction error variance at business cycle horizons.

Keywords: Nonfundamentalness, SVAR, Imperfect Information, News, Noise, Business cycles

JEL Classification: C32, E32, E62

Suggested Citation: Suggested Citation

Forni, Mario and Gambetti, Luca and Lippi, Marco and Sala, Luca, Noisy News in Business Cycles (November 2014). Baffi Center Research Paper No. 2014-159, Available at SSRN: https://ssrn.com/abstract=2527926 or http://dx.doi.org/10.2139/ssrn.2527926