DP8274 No News in Business Cycles
|Author(s):||Mario Forni, Luca Gambetti, Luca Sala|
|Publication Date:||February 2011|
|Keyword(s):||fundamentalness, invertibility, news shocks, structural factor model|
|JEL(s):||C32, E32, E62|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||http://www.cepr.org/pubs/dps/DP8274|
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.