An important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks. Findings from estimated DSGE models that in theory allow news shocks to matter quantitatively suggest that they do not. This disconnect can be resolved once we augment a DSGE model with a financial channel that provides amplification to news shocks. Our results suggest that news shocks to the future growth prospects of the economy are significant drivers of U.S. fluctuations, explaining as much as 50% and 37% of the variance in hours worked and output, respectively, in cyclical frequencies.

Issue Section:
Articles
© 2017 The President and Fellows of Harvard College and the Massachusetts Institute of Technology
2017
The President and Fellows of Harvard College and the Massachusetts Institute of Technology

Supplementary data

rest_a_00612-esupp- pdf file
You do not currently have access to this content.