Learning from news

Luis Herrera and Jesús Vázquez

Journal of Macroeconomics, 2025, vol. 85, issue C

Abstract: This paper contributes to two strands of business cycle literature — news shocks and bounded rationality — by assessing the empirical importance of TFP news shocks while relaxing the rational expectations assumption. We estimate a medium-scale DSGE model, incorporating financial frictions and TFP news shocks, under two different expectation formation mechanisms: rational expectations (RE) and adaptive learning (AL). The results suggest that AL amplifies the effects of financial market frictions, leading to three key findings. First, AL improves the model’s fit, as shown in the related literature, and better replicates the volatility of several aggregate variables. Second, the AL amplification results in a deflationary response and a more persistent reaction of lending spreads to TFP news shocks. Third, AL increases the importance of pure news shocks (i.e. purely anticipated shocks), amplifying their effects through both expectation and credit channels. Finally, we show that the dynamics generated by the DSGE model under AL align more closely with empirical VAR evidence than those produced by the RE version of the DSGE model.

Keywords: News shocks; Bounded rationality; Financial frictions (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070425000278
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:85:y:2025:i:c:s0164070425000278

DOI: 10.1016/j.jmacro.2025.103690

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().