Observed Expectations, News Shocks, and the Business Cycle

Fabio Milani and Ashish Rajrhandari ()
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Ashish Rajrhandari: Department of Economics, University of California-Irvine
Authors registered in the RePEc Author Service: Ashish Rajbhandari ()

No 121305, Working Papers from University of California-Irvine, Department of Economics

Abstract: This paper exploits information from the term structure of survey expectations to identify news shocks in a a DSGE model with rational expectations. We estimate a structural business-cycle model with price and wage stickiness. We allow for both unanticipated and anticipated components ("news") in each structural disturbance: neutral and investment-specific technology shocks, government spending shocks, risk premium, price and wage markup shocks, and monetary policy shocks. We show that the estimation of a standard DSGE model with realized data obfuscates the identification of news shocks and yields weakly or non-identified parameters pertaining to such shocks. The identification of news shocks greatly improves when we re-estimate the model using data on observed expectations regarding future output, consumption, investment, government spending, inflation, and interest rates - at horizons ranging from one-period to five-periods ahead. The news series thus obtained largely differ from their counterparts that are estimated using only data on realized variables. Moreover, the results suggest that the identified news shocks explain a sizable portion of aggregate fluctuations. News about investment-specific technology and risk premium shocks play the largest role, followed by news about labor supply (wage markup) and monetary policy.

Keywords: News Shocks; Estimation of DSGE Model with Survey Expectations; News in Business Cycles; Identification in DSGE Models; Rational Expectations (search for similar items in EconPapers)
JEL-codes: E32 E50 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2012-12
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (25)

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Related works:
Journal Article: Observed expectations, news shocks, and the business cycle (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:irv:wpaper:121305

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