Risk news shocks and the business cycle

Gabor Pinter, Konstantinos Theodoridis and Anthony Yates ()

No 483, Bank of England working papers from Bank of England

Abstract: We identify a ‘risk news' shock in a vector autoregression (VAR), modifying Barsky and Sims’s procedure, while incorporating sign restrictions to simultaneously identify monetary policy, technology and demand shocks. The VAR-identifed risk news shock is estimated to account for around 2%-12% of business cycle fluctuations depending on which risk proxy we use; regardless, contemporaneous risk and risk news shocks together account for about 20%. This is substantially lower than the 60% reported in Christiano, Motto, and Rostagno’s full-information exercise. We fit a DSGE model with financial frictions to these impulse responses and find that, in order to match the fall in consumption recorded by the VAR, we have to allow for 75% of consumers to be living hand-to-mouth.

Keywords: News shock; business cycles; risk; financial frictions; vector autoregression (search for similar items in EconPapers)
JEL-codes: C10 C32 E20 E30 E58 G21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2013-12-20
New Economics Papers: this item is included in nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0483

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