On the significance of quality-of-capital news shocks

Luis Herrera () and Jesús Vázquez

Economic Modelling, 2023, vol. 124, issue C

Abstract: This paper assesses the significance of quality-of-capital (QoC) news shocks and their transmission through the credit channel in explaining aggregate fluctuations. Our framework is an estimated medium-scale DSGE model augmented with a financial sector where two alternative sources of news shocks are considered. One is a (standard) total-factor-productivity (TFP) news shock; the other is a QoC news shock. The latter has a clear meaning that enables a close link to be built up between financial markets and the macroeconomy through the credit and expectation channels, which greatly improves model fit and largely displaces TFP news shocks as a source of the business cycle. The significance of pure (rather than realized) news underscores the role of expectations.

Keywords: Quality-of-capital news; TFP news; Credit channel; Aggregate fluctuations; DSGE model; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E30 E32 E44 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:124:y:2023:i:c:s0264999323000950

DOI: 10.1016/j.econmod.2023.106283

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