What׳s news in News? A cautionary note on using a variance decomposition to assess the quantitative importance of news shocks

Eric Sims ()

Journal of Economic Dynamics and Control, 2016, vol. 73, issue C, 41-60

Abstract: This paper points out a conceptual difficulty in using a variance decomposition to assess the quantitative importance of news shocks. A variance decomposition will attribute to news shocks movements in endogenous variables driven both by news about future exogenous fundamentals that has yet to materialize (what I call “pure news”) as well as movements driven by realized changes in fundamentals that were anticipated in the past (what I call “realized news”). I present a stylized model in which news about yet unrealized changes in fundamentals is irrelevant for output dynamics, but in which a variance decomposition may nevertheless attribute a large share of the variance of output to news shocks. I then revisit the quantitative importance of news in the model of Schmitt-Grohe and Uribe (2012). In their model news shocks account for 40 percent of the variance of output growth, but this is mostly driven by realized news.

Keywords: News shocks; Variance decomposition (search for similar items in EconPapers)
JEL-codes: E30 E32 E37 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:73:y:2016:i:c:p:41-60

DOI: 10.1016/j.jedc.2016.09.005

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