News Shocks and Business Cycles

This article considers the question, raised by Beaudry and Portier in their recent articles, of whether "news shocks" can lead to expansions and contractions that look like business cycle movements. News shocks are to be thought of solely as affecting expectations (regarding future events) and thus do not influence current resource restrictions at all. So the question is, for example, whether news about lower future productivity could lead our key aggregate variables—consumption, investment, and employment—to co-move down now. Beaudry and Portier make the point that standard neoclassical models clearly will not allow this outcome, and they, along with other researchers in follow-up work, suggest elaborations on the standard model that would. In the present research, we review this literature and propose a very simple model that does quite well in predicting co-movements in response to news shocks. The model is based on a departure from competitive labor markets: It uses a standard Diamond-Mortensen-Pissarides view that unemployment is determined as a function of search/matching frictions.

[1]  C. Pissarides,et al.  The Unemployment Volatility Puzzle: Is Wage Stickiness the Answer? , 2009 .

[2]  Marcus Hagedorn,et al.  The Cyclical Behavior of Equilibrium Unemployment and Vacancies Revisited , 2008, SSRN Electronic Journal.

[3]  Finn E. Kydland,et al.  Time to Build and Aggregate Fluctuations , 1982 .

[4]  Vintage Capital and Expectations Driven Business Cycles , 2007 .

[5]  J. R. Mora,et al.  The effect of GNP announcements on fluctuations of GNP growth , 2007 .

[6]  Eric R. Sims,et al.  Expectations Driven Business Cycles : An Empirical Evaluation , 2008 .

[7]  Jean-Paul L’Huillier,et al.  News, Noise, and Fluctuations: An Empirical Exploration , 2009 .

[8]  Karl Shell,et al.  Do Sunspots Matter? , 1983, Journal of Political Economy.

[9]  G. Angeletos,et al.  Noisy Business Cycles , 2009, NBER Macroeconomics Annual.

[10]  R. Lucas.  Expectations and the neutrality of money , 1972 .

[11]  G. Violante,et al.  Unemployment and Vacancy Fluctuations in the Matching Model: Inspecting the Mechanism , 2005 .

[12]  T. Sargent,et al.  ABCs (and Ds) of Understanding VARs , 2007 .

[13]  Per Krusell,et al.  The Role of Investment-Specific Technological Change in the Business Cycle , 2000 .

[14]  S. Rebelo,et al.  Can News About the Future Drive the Business Cycle? , 2006 .

[15]  P. Beaudry,et al.  Stock Prices, News and Economic Fluctuations , 2003 .

[16]  M. Uribe,et al.  What's News in Business Cycles , 2008 .

[17]  Paul Beaudry,et al.  An Exploration into Pigou's Theory of Cycles , 2001 .

[18]  Jeremy Greenwood,et al.  Investment, Capacity Utilization and the Real Business Cycle , 1988 .

[19]  R. Shimer.  The Cyclical Behavior of Equilibrium Unemployment and Vacancies , 2005 .

[20]  Robert B. Barsky,et al.  Information, Animal Spirits, and the Meaning of Innovations in Consumer Confidence , 2009 .

[21]  Sveriges Riksbank.  Expectation driven business cycles with limited enforcement , 2009 .

[22]  Paul Beaudry,et al.  When Can Changes in Expectations Cause Business Cycle Fluctuations in Neo-Classical Settings? , 2004, J. Econ. Theory.

[23]  C. A. Pissarides,et al.  Short-run Equilibrium Dynamics of Unemployment Vacancies, and Real Wages , 1985 .

[24]  Wouter J. den Haan,et al.  Anticipated Growth and Business Cycles in Matching Models , 2007 .

[25]  C. A. Pissarides,et al.  Equilibrium Unemployment Theory , 1990 .

[26]  Lawrence J. Christiano,et al.  Monetary Policy and Stock Market Boom-Bust Cycles , 2008, SSRN Electronic Journal.