Working Paper: NBER ID: w20666
Authors: Robert B. Barsky; Susanto Basu; Keyoung Lee
Abstract: Does news about future productivity cause business-cycle fluctuations? What other effects might it have? We explore the answer to this question using semi-structural VARs, where “news” is defined as the innovation in the expectation of TFP at a fixed horizon in the future. We find that systems incorporating a number of forward-looking variables, including stock prices, consumption, consumer confidence and inflation, robustly predict three outcomes. First, following a news shock, TFP rises for several years. Second, inflation falls immediately and substantially, and stays low, often for 10 quarters or more. Third, there is a sharp increase in a forward-looking measure of consumer confidence. Consumption typically rises following good news, but investment, consumer durables purchases and hours worked typically fall on impact. All the quantity variables subsequently rise, as does TFP. Depending on the specification of the reduced form VAR, the activity variables may lead TFP to some extent – possibly lending some support to the hypothesis of news-driven business cycles – or they may move in lockstep with productivity. For the most part, the quantity and inflation responses are quite consistent with the predictions of a standard New Keynesian model augmented with real wage inertia.
Keywords: news shocks; business cycles; productivity; inflation; consumer confidence
JEL Codes: E32; E37; O40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| news shocks (G14) | TFP (F16) |
| news shocks (G14) | inflation (E31) |
| news shocks (G14) | consumer confidence (D12) |
| news shocks (G14) | consumption (E21) |
| news shocks (G14) | investment (G31) |
| news shocks (G14) | hours worked (J22) |
| consumption (E21) | investment (G31) |
| consumption (E21) | hours worked (J22) |