News or Noise? The Missing Link
Ryan Chahrour and
Kyle Jurado ()
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Kyle Jurado: Duke University
No 917, Boston College Working Papers in Economics from Boston College Department of Economics
The macroeconomic literature on belief-driven business cycles treats news and noise as distinct representations of people's beliefs about economic fundamentals. We prove that these two representations are actually observationally equivalent. This means that the decision to use one representation or the other must be made on theoretical, and not empirical, grounds. Our result allows us to determine the importance of beliefs as an independent source of fluctuations. Using three prominent models from this literature, we show that existing research has understated the importance of independent shocks to beliefs. This is because representations with anticipated and unanticipated shocks mix the fluctuations due independently to beliefs with the fluctuations due to fundamentals. We also argue that the observational equivalence of news and noise representations implies that structural vector auto-regression analysis is equally appropriate for recovering both news and noise shocks.
Keywords: News; noise; business cycles; structural vector autoregression (search for similar items in EconPapers)
JEL-codes: C31 D84 E32 (search for similar items in EconPapers)
Date: 2016-09-07, Revised 2017-11-02
New Economics Papers: this item is included in nep-hpe
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Journal Article: News or Noise? The Missing Link (2018)
Working Paper: News or Noise? The Missing Link (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:boc:bocoec:917
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