Whither News Shocks?

Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semistructural vector autoregressions (VARs), where "news" is defined as the innovation in the expectation of total factor productivity (TFP...

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Bibliographic Details
Published in:NBER macroeconomics annual 2015-01, Vol.29 (1), p.225-264
Main Authors: Barsky, Robert B., Basu, Susanto, Lee, Keyoung
Format: Article
Language:English
Subjects:
Business cycles
Business innovation
Consumer confidence
Economic fluctuations
Inflation
Inflation shocks
Keynesian theory
Modeling
Price shocks
Productivity
Regression analysis
Stock prices
Studies
Supply shocks
Vector autoregression
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Summary:Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semistructural vector autoregressions (VARs), where "news" is defined as the innovation in the expectation of total factor productivity (TFP) at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, and 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.
ISSN:0889-3365
1537-2642
DOI:10.1086/680625