News and why it is not shocking: The role of micro-foundations

Vo Phuong Mai Le, David Meenagh and A. Patrick Minford

Journal of International Financial Markets, Institutions and Money, 2020, vol. 66, issue C

Abstract: A number of studies have found that news shocks account for a large part of the aggregate fluctuations of the main macroeconomic variables. We show that when taking rational expectations into consideration there is a limit on the size of the variance of the news shocks, which has not been considered in the literature. We offer an explanation to why this restriction should be imposed and show, with an empirical example from a recent paper, that if you do impose the rational expectations restriction the importance of news is drastically reduced.

Keywords: News shocks; DSGE; Rational expectations (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:66:y:2020:i:c:s1042443120300834

DOI: 10.1016/j.intfin.2020.101199

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