News Shocks and Business Cycles: Bridging the Gap from Different Methodologies
Tsoukalas, John D.
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An important disconnect in the news driven view of the business cycle formalized by Beaudry and Portier (2004), is the lack of agreement between diﬀerent—VAR and DSGE—methodologies over the empirical plausibility of this view. We argue that this disconnect can be largely resolved once we augment a standard DSGE model with a ﬁnancial channel that provides ampliﬁcation to news shocks. Both methodologies suggest news shocks to the future growth prospects of the economy to be signiﬁcant drivers of U.S. business cycles in the post-Greenspan era (1990-2011), explaining as much as 50% of the forecast error variance in hours worked in cyclical frequencies