Noisy News in Business Cycles
45 Pages Posted: 20 Nov 2014
Date Written: November 2014
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