News and Financial Intermediation in Aggregate Fluctuations

Görtz, Christoph and Tsoukalas, John (2011): News and Financial Intermediation in Aggregate Fluctuations.

Abstract

We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s.

• Item Type: MPRA Paper
• Language: English
• Keywords: News; Anticipation effects; Business cycles; DSGE; Bayesian estimation
• Subjects: E - Macroeconomics and Monetary Economics > E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

Alexopoulos, M. (2011). Read all about it!! What happens following a technology shock? American Economic Review, 101(4):1144–79.

An, S. and Schorfheide, F. (2007). Bayesian analysis of DSGE models. Econometric Reviews, 26(2-4):213–172.

Barro, R. J. and King, R. G. (1984). Time-separable preferences and intertemporal-substitution models of business cycles. The Quarterly Journal of Economics, 99:817–839.

Barsky, R. B. and Sims, E. R. (2011). Information, animal spirits, and the meaning of innovations in consumer confidence. Journal of Monetary Economics, forthcoming.

Beaudry, P. and Portier, F. (2004). An exploration into Pigou’s theory of cycles. Journal of Monetary Economics, 51(6):1183–1216.

Beaudry, P. and Portier, F. (2006). News, stock prices and economic fluctuations. The American Economic Review, 96(4):1293–1307.

Beaudry, P. and Portier, F. (2007). When can changes in expectations cause business cycle fluctuations in neo-classical settings? Journal of Economic Theory, 135:458–477.

Beveridge, W. H. (1909). Unemployment: A Problem of Industry. Longmans Green, London.

Brooks, S. P. and Gelman, A. (1998). General methods for monitoring convergence of iterative simulations. Journal of Computational and Graphical Statistics, 7(4):434–455.

Brunnermeier, M. and Sannikov, Y. (2009). A macroeconomic model with a financial sector. Princeton University, mimeo.

Calvo, G. A. (1983). Staggered prices in a utility-maximizing framework. Journal of Monetary Economics, 12(3):383–398.

Caplin, A. and Leahy, J. (1997). Aggregation and optimization with state-dependent pricing. Econometrica, 65(3):601–626.

Christiano, L., Motto, R., and Rostagno, M. (2008). Monetary policy and stock market boombust cycles. Working Paper Series 955, European Central Bank.

Christiano, L. J., Eichenbaum, M., and Evans, C. L. (2005). Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy, 113(1):1–45.

Clark, J. M. (1935). Strategic Factors in Business Cycles. National Bureau for Economic Research, New York.

Cochrane, J. H. (1994). Shocks. Carnegie-Rochester Conference Series on Public Policy, 41(1):295–364.

Cochrane, J. H. and Piazzesi, M. (2005). Bond risk premia. American Economic Review, 95(1):138–160.

Corrado, C., Hulten, C., and Sichel, D. (2009). Intangible capital and U.S. economic growth. Review of Income and Wealth, 55(3):661–685.

Davis, J. (2007). News and the term structure in general equilibrium. Manuscript, Northwestern University.

Del Negro, M., Schorfheide, F., Smets, F., and Wouters, R. (2007). On the fit and forecasting performance of new Keynesian models. Journal of Business and Economic Statistics, 25(2):132–162.

DiCecio, R. (2009). Sticky wages and sectoral labor comovement. Journal of Economic Dynamics and Control, 33(3):538 – 553.

Erceg, C. J., Henderson, D. W., and Levin, A. T. (2000). Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics, 46(2):281–313.

Fernández-Villaverde, J. (2010). The econometrics of DSGE models. SERIEs: Journal of the Spanish Economic Association, 1:3–49.

Fujiwara, I., Hirose, Y., and Shintani, M. (2011). Can news be a major source of aggregate fluctuations? A Bayesian DSGE approach. Journal of Money, Credit and Banking, 43(1):1– 29.

Gertler, M. and Karadi, P. (2011). A model of unconventional monetary policy. Journal of Monetary Economics, 58(1):17 – 34.

Gertler, M. and Kiyotaki, N. (2010). Financial intermediation and credit policy in business cycle analysis. Handbook of Monetary Economics (forthcoming).

Gertler, M., Kiyotaki, N., and Queralto, A. (2011). Financial crises, bank risk exposure and government financial policy. Princeton University Mimeo.

Gilchrist, S. and Zakrajsek, E. (2011). Credit spreads and business cycle fluctuations. The American Economic Review, forthcoming.

Görtz, C. and Tsoukalas, J. (2011a). Learning, capital-embodied technology and aggregate fluctuations. Centre for Finance and Credit Markets Working Paper, 11/06.

Görtz, C. and Tsoukalas, J. (2011b). UK business cycles:Evidence from an estimated twosector DSGE model. University of Nottingham Mimeo.

Gourio, F. (2009). Disasters risk and business cycles. NBER Working Papers 15399, National Bureau of Economic Research, Inc.

Hall, R. E. (1997). Macroeconomic fluctuations and the allocation of time. Journal of Labor Economics, 15(1):S223–50.

Hall, R. E. (2001a). The stock market and capital accumulation. American Economic Review, 91(5):1185–1202.

Hall, R. E. (2001b). Struggling to understand the stock market. American Economic Review, 91(2):1–11.

Jaimovich, N. and Rebelo, S. (2009). Can news about the future drive the business cycle? American Economic Review, 99(4):1097–1118.

Justiniano, A. and Primiceri, G. E. (2008). The time-varying volatility of macroeconomic fluctuations. The American Economic Review, 98:604–641(38).

Justiniano, A., Primiceri, G. E., and Tambalotti, A. (2010). Investment shocks and business cycles. Journal of Monetary Economics, 57(2):132–145.

Khan, H. and Tsoukalas, J. (2009). The quantitative importance of news shocks in estimated dsge models. Carleton Economic Papers 09-07, Carleton University, Department of Economics.

Khan, H. and Tsoukalas, J. (2011). Investment shocks and the comovement problem. Journal of Economic Dynamics and Control, 35(1):115 – 130.

Laitner, J. and Stolyarov, D. (2003). Technological change and the stock market. American Economic Review, 93(4):1240–1267.

Leeper, E. M.,Walker, T. B., and Yang, S.-C. S. (2009). Fiscal foresight and information flows. NBER Working Papers 14630, National Bureau of Economic Research, Inc.

Levin, A. T., Onatski, A., Williams, J. C., and Williams, N. (2005). Monetary policy under uncertainty in micro-founded macroeconometric models. in M. Gertler and K. Rogoff (eds), NBER Macroeconomics Annual, pages 229–287.

Lubik, T. A. and Schorfheide, F. (2004). Testing for indeterminacy: An application to U.S. monetary policy. American Economic Review, 94(1):190–217.

Mankiw, N. Gregory and Reis, Ricardo (2002). Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve. The Quarterly Journal of Economics, 117(4):1295–1328.

McGrattan, E. R. and Prescott, E. C. (2000). Is the stock market overvalued? Quarterly Review, (Fall):20–40.

Merton, R. C. (1973). An intertemporal capital asset pricing model. Econometrica, 41(5):867– 87.

Pigou, A. C. (1926). Industrial Fluctuations. Macmillan. London. Rotemberg, J., J. and Woodford, M. (1995). Dynamic General Equilibrium Models with Imperfectly Competitive Product Markets, chapter 9, pages 243–293. in Frontiers of Business Cycle Research. Princeton University Press, Princeton, NJ.

Rotemberg, J. J. (2003). Stochastic technical progress, smooth trends, and nearly distinct business cycles. American Economic Review, 93(5):1543–1559.

Schmitt-Grohe, S. and Uribe, M. (2010). What’s news in business cycles. Technical report, Columbia University Mimeo.

Sims, C. A. (2003). Implications of rational inattention. Journal of Monetary Economics, 50(3):665–690.

Smets, F. and Wouters, R. (2007). Shocks and frictions in US business cycles: A Bayesian DSGE approach. American Economic Review, 97(3):586–606. Uhlig, H. (2009). Some fiscal calculus. Technical report, University of Chicago Mimeo.

Van Nieuwerburgh, S. and Veldkamp, L. (2006). Learning asymmetries in real business cycles. Journal of Monetary Economics, 53:753–772.

Walsh, C. E. (1993). What caused the 1990-1991 recession? Economic Review, pages 33–48.

Woodford, M. and Walsh, C. E. (2005). Interest and prices: Foundations of a theory of monetary policy. Macroeconomic Dynamics, 9(03):462–468.