Whither News Shocks?

Abstract

Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where "news" is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent -possibly lending some support to the hypothesis of news-driven business cycles -or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.

Macroeconomic Shocks and Their Propagation

“…More recently, however, Barsky and Sims (2011) and Barsky, Basu and Lee (2014) have used medium run restrictions and series on consumer confidence to identify news shocks and found that news shocks did not generate business cycle fluctuations. In particular, hours fell when news arrived.…”

Financial frictions, trends, and the great recession

“…The exit rate is set to 0.03, in line with the values used in the literature (Bilbiie, Ghironi, and Melitz () and Kung and Schmid ()). The capital depreciation rate in the steady state is set to 0.03, again, in line with the value used in the literature (e.g., Barsky, Basu, and Lee ()). Following Del Negro, Eggertsson, Ferrero, and Kiyotaki () and Shi (), we set the resalability of new equities θ to 0.15.…”

Revisions in Utilization-Adjusted TFP and Robust Identification of News Shocks

“…), making news shocks a potentially important source of business cycle fluctuations. Moreover, the deflationary impact of news shocks, whichBarsky, Basu, and Lee (2015) cite as one of the most robust features of the data, is no longer statistically significant.…”

“… See Beaudry and Portier (2014) andBarsky, Basu, and Lee (2015) for excellent reviews of this literature.2 News coincide with innovations in current productivity if, for example, the successful adoption of a new technology by a firm both raises current productivity and provides news that other firms will adopt the same technology in the future.3 A separate question is whether changes in expectations about future productivity are exogenous -as the news literature typically assumes -or whether these changes are related to other shocks. While not of immediate importance for the issue of whether imposing the zero impact restriction is appropriate or not, we return to this question below when we assess the empirical implications of our alternative identification approach.…”