No News in Business Cycles

Forni, Mario; Gambetti, Luca; Sala, Luca

doi:10.2139/ssrn.2160736

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No News in Business Cycles

Paolo Baffi Centre Research Paper No. 2012-126

41 Pages Posted: 13 Oct 2012

See all articles by Mario Forni

Mario Forni

Università degli studi di Modena e Reggio Emilia (UNIMORE) - Faculty of Business and Economics; Centre for Economic Policy Research (CEPR)

Luca Sala

University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER)

Date Written: October 2012

Abstract

A structural, large dimensional factor model is used 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 VAR 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) a substantial fraction of business cycle uctuations are explained by shocks unrelated to technology.

Keywords: structural factor model, news shocks, invertibility, fundamentalness

JEL Classification: C32, E32, E62

Suggested Citation: Suggested Citation

Forni, Mario and Gambetti, Luca and Sala, Luca, No News in Business Cycles (October 2012). Paolo Baffi Centre Research Paper No. 2012-126, Available at SSRN: https://ssrn.com/abstract=2160736 or http://dx.doi.org/10.2139/ssrn.2160736