Working Paper: CEPR ID: DP9601
Authors: Mario Forni; Luca Gambetti; Marco Lippi; Luca Sala
Abstract: In a situation where agents can only observe a noisy signal of the shock to future economic fundamentals, SVAR models can still be successfully employed to estimate the shock and the associated impulse response functions. Identification is reached by means of dynamic rotations of the reduced form residuals. We use our identification approach to investigate the role of the "noise" shock the component of the signal observed by agents which is unrelated to economic fundamentals as a source of business cyclefluctuations. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for about a third of their prediction error variance at business cycle horizons.
Keywords: business cycle; imperfect information; news; noise; nonfundamentalness; SVAR
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 |
|---|---|
| noise shocks (R41) | business cycle fluctuations (E32) |
| noise shocks (R41) | GDP (E20) |
| noise shocks (R41) | consumption (E21) |
| noise shocks (R41) | investment (G31) |
| expectations of future changes in economic fundamentals (D84) | business cycle fluctuations (E32) |
| real shocks + noise shocks (E39) | fluctuations in GDP (E32) |
| real shocks + noise shocks (E39) | fluctuations in consumption (E21) |
| real shocks + noise shocks (E39) | fluctuations in investment (E22) |