Estimating Macroeconomic News and Surprise Shocks

Lutz Kilian, Michael Plante and Alexander Richter

No 2304, Working Papers from Federal Reserve Bank of Dallas

Abstract: The importance of understanding the economic effects of TFP news and surprise shocks is widely recognized in the literature. A common VAR approach is to identify responses to TFP news shocks by maximizing the variance share of TFP over a long horizon. Under suitable conditions, this approach also implies an estimate of the surprise shock. We find that these TFP max share estimators tend to be strongly biased when applied to data generated from DSGE models with shock processes that match the TFP moments in the data, both in the presence of TFP measurement error and in its absence. Incorporating a measure of TFP news into the VAR model and adapting the identification strategy substantially reduces the bias and RMSE of the impulse response estimates, even when there is sizable measurement error in the news variable. When applying this method to the data, we find that news shocks are slower to diffuse to TFP and have a smaller effect on real activity than implied by the TFP max share method.

Keywords: Structural VAR; total factor productivity (TFP); news; Measurement error; max-share (search for similar items in EconPapers)
JEL-codes: C32 C51 C61 E32 (search for similar items in EconPapers)
Pages: 40
Date: 2023-04-20, Revised 2024-03-22
New Economics Papers: this item is included in nep-des, nep-ecm and nep-ets
References: View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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DOI: 10.24149/wp2304r2

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