Discussion paper

DP8274 No News in Business Cycles

This paper uses a structural, large dimensional factor model to evaluate the role of 'news' shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by 'non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle fluctuations is explained by shocks unrelated to technology.

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Citation

Forni, M, L Sala and L Gambetti (2011), ‘DP8274 No News in Business Cycles‘, CEPR Discussion Paper No. 8274. CEPR Press, Paris & London. https://cepr.org/publications/dp8274