News, Real-Time Forecasts, and the Price Puzzle
37 Pages Posted: 16 Dec 2016 Last revised: 10 Jan 2017
Date Written: January 9, 2017
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
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