News, Uncertainty and Economic Fluctuations

45 Pages Posted: 18 Jul 2017

See all articles by Mario Forni

Mario Forni

Università di Modena; Centre for Economic Policy Research (CEPR)

Luca Gambetti

Universitat Autonoma de Barcelona

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Date Written: July 2017

Abstract

We formalize the idea that uncertainty is generated by news about future developments in economic conditions which are not perfectly predictable by the agents. Using a simple model of limited information, we show that uncertainty shocks can be obtained as the square of news shocks. We develop a two-step econometric procedure to estimate the effects of news and we find highly nonlinear effects. Large news shocks increase uncertainty. This mitigates the effects of good news and amplifies the effects of bad news in the short run. By contrast, small news shocks reduce uncertainty and increase output in the short run. The Volcker recession and the Great Recession were exacerbated by the uncertainty effects of news.

Suggested Citation

Forni, Mario and Gambetti, Luca and Sala, Luca, News, Uncertainty and Economic Fluctuations (July 2017). CEPR Discussion Paper No. DP12139. Available at SSRN: https://ssrn.com/abstract=3003916

Mario Forni (Contact Author)

Università di Modena; Centre for Economic Policy Research (CEPR) ( email )

Luca Gambetti

Universitat Autonoma de Barcelona ( email )

Plaça Cívica
Cerdañola del Valles
Barcelona, Barcelona 08193
Spain

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER) ( email )

Via Roentgen 1
Milan, 20136
Italy
+39 02 5836 3326 (Phone)

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