News or Noise? The Missing Link

50 Pages Posted: 12 Sep 2016  

Ryan A. Chahrour

Boston College - Department of Economics

Kyle Jurado

Duke University - Department of Economics

Date Written: September 7, 2016

Abstract

The macroeconomic literature on belief-driven business cycles treats news and noise as distinct representations of people’s beliefs about economic fundamentals. We prove that these two representations are actually observationally equivalent. This means that the decision to use one representation or the other must be made on theoretical, and not empirical, grounds. Our result allows us to determine the importance of beliefs as an independent source of fluctuations. Using three prominent models from this literature, we show that existing research has understated the importance of independent shocks to beliefs. This is because representations with anticipated and unanticipated shocks mix the fluctuations due independently to beliefs with the fluctuations due to fundamentals. We also argue that the observational equivalence of news and noise representations implies that structural vector auto-regression analysis is equally appropriate for recovering both news and noise shocks.

Suggested Citation

Chahrour, Ryan A. and Jurado, Kyle, News or Noise? The Missing Link (September 7, 2016). Economic Research Initiatives at Duke (ERID) Working Paper No. 228. Available at SSRN: https://ssrn.com/abstract=2837258

Ryan A. Chahrour

Boston College - Department of Economics ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

HOME PAGE: http://www.chahrour.net

Kyle Jurado (Contact Author)

Duke University - Department of Economics ( email )

213 Social Sciences Building
Box 90097
Durham, NC 27708-0204
United States

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