We investigate the role of "noise" shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced-form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment, and account for a sizable fraction of their prediction error variance at business cycle horizons.
Noisy News in Business Cycles / Forni, Mario; Gambetti, Luca; Lippi, Marco; Sala, Luca. - In: AMERICAN ECONOMIC JOURNAL, MACROECONOMICS. - ISSN 1945-7715. - 9:4(2017), pp. 122-152. [10.1257/mac.20150359]
Noisy News in Business Cycles
FORNI, Mario;GAMBETTI, Luca;LIPPI, Marco;
2017-01-01
Abstract
We investigate the role of "noise" shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced-form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment, and account for a sizable fraction of their prediction error variance at business cycle horizons.
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