Working Paper: CEPR ID: DP8274
Authors: Mario Forni; Luca Gambetti; Luca Sala
Abstract: 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.
Keywords: fundamentalness; invertibility; news shocks; structural factor model
JEL Codes: C32; E32; E62
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| existing small-scale VECM models (C22) | inaccurate recovery of structural shocks and impulse response functions (C22) |
| news shocks (G14) | fluctuations in investment, consumption, and GDP (E20) |
| news shocks (G14) | negative impact responses in hours worked and investment (F66) |
| news shocks (G14) | consumption and stock prices remain largely unaffected initially (E20) |
| technology shocks (D89) | non-zero impact effect on productivity (F69) |
| technology shocks (D89) | TFP volatility (G17) |
| technology shocks (D89) | business cycle fluctuations in investment, consumption, and GDP (E32) |
| shocks unrelated to technology (O33) | business cycle fluctuations (E32) |