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News, Real-Time Forecasts, and the Price Puzzle

37 Pages Posted: 16 Dec 2016 Last revised: 10 Jan 2017

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Gabriela Best

California State University, Fullerton - Mihaylo College of Business & Economics

Date Written: January 9, 2017

Abstract

This paper revisits the effects of news shocks in the context of an otherwise standard New Keynesian dynamic general equilibrium (DSGE) model. We use the U.S. real-time forecasts from the Federal Reserve's Green Book to model agents' and the central bank's expectations of future macroeconomic outcomes. We show that unlike with the ex post data where the identification of news shocks is driven by the modeling assumptions, the identification strategy that relies on the Greenbook forecasts ascribes a larger role to news shocks in explaining variation in the model's endogenous variables. Furthermore, we demonstrate that the presence of sizable news shocks explains the emergence of the price puzzle in the structural vector autoregressive framework.

Keywords: E31, E32, E52

JEL Classification: New Keynesian model, Monetary policy, News shocks, Price puzzle

Suggested Citation

Kapinos, Pavel S. and Best, Gabriela, News, Real-Time Forecasts, and the Price Puzzle (January 9, 2017). Available at SSRN: https://ssrn.com/abstract=2886190 or http://dx.doi.org/10.2139/ssrn.2886190

Pavel Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

Gabriela Best

California State University, Fullerton - Mihaylo College of Business & Economics ( email )

P.O. Box 6848
Fullerton, CA CA 92834-6848
United States

HOME PAGE: http://www.gabrielabest.com/

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