News and Financial Intermediation in Aggregate Fluctuations

Abstract

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 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 news shocks to the future growth * We thank Mark Watson and two anonymous referees for very constructive comments which significantly improved the paper. We also thank,

News shocks and labour market dynamics in matching models

“…In addition, in line with Schmitt‐Grohe and Uribe (), Christiano et al. () and Görtz and Tsoukalas (), news shocks explain a sizeable fraction of movements in macroeconomic variables. Finally, it is interesting to note that unanticipated shocks to the job destruction rate explain the bulk of fluctuations in unemployment from the fourth quarter ahead onwards.…”

“…In addition, Kurmann and Otrok () also use a similar VAR methodology to show that news shocks provide strong linkages between the yield curve, inflation and real output. This analysis is complemented by recent studies by Beaudry and Portier (), Schmitt‐Grohe and Uribe (), Khan and Tsoukalas () and Görtz and Tsoukalas (), who identify and estimate news shocks in the context of fully specified general equilibrium models. Our paper contributes to both realms of research by identifying the effect of news shocks on labour market aggregates in the context of a fully specified general equilibrium model, with labour market search and matching frictions estimated with Bayesian methods.…”

Intersectoral Labor Immobility, Sectoral Comovement, and News Shocks

“…This is similar to the value reported in Fujiwara, Hirose, and Shintani () but is quantitatively larger than those reported by Khan and Tsoukalas () and Schmitt‐Grohé and Uribe (). In contrast with the existing studies, including ours, the recent work by Görtz and Tsoukalas () find that technology news shocks, especially consumption sector‐specific TFP news shocks, which are absent in our specification, play a large role in accounting for fluctuations in macroeconomic variables. As emphasized by Görtz and Tsoukalas (), procyclicality of the relative price of investment goods is a key for the consumption sector‐specific technology news shock to generate economic fluctuations together with financial frictions.…”

“…In contrast with the existing studies, including ours, the recent work by Görtz and Tsoukalas () find that technology news shocks, especially consumption sector‐specific TFP news shocks, which are absent in our specification, play a large role in accounting for fluctuations in macroeconomic variables. As emphasized by Görtz and Tsoukalas (), procyclicality of the relative price of investment goods is a key for the consumption sector‐specific technology news shock to generate economic fluctuations together with financial frictions. However, we do not find a significant positive correlation between the relative price of investment goods and investment, when the longer sample period is used and/or a different detrending method is applied.…”

Overaccumulation, Interest, and Prices

“…The role of the inflation-targeting central bank is also critical in lowering the risk-free rate when the shock hits in period 8 to catalyze the boom. This mechanism through which an expected change in fundamentals in the future impacts credit conditions today is reminiscent of other models in the literature such as Jermann and Quadrini (2007), Walentin (2014), and Gortz and Tsoukalas (2017). Now focusing on the case of unfulfilled expectations, the path of the solid line depicts the case where in period 8 the agents find out that TFP does not rise as expected.…”