The Quantitative Importance of News Shocks in Estimated DSGE Models

Hashmat Khan () and John Tsoukalas

No 09-07, Carleton Economic Papers from Carleton University, Department of Economics

Abstract: We estimate a dynamic stochastic general equilibrium (DSGE) model with several frictions and both unanticipated and news shocks, using quarterly US data from 1954-2004 and Bayesian methods. We find that unanticipated shocks dominate news shocks in accounting for the unconditional variance of output, consumption, and investment growth, interest rate, and the relative price of investment. The unanticipated shock to the marginal eficiency of investment is the dominant shock, accounting for over 45% of the variance in output growth. News shocks account for less than 15% of the variance in output growth. Within the set of news shocks, non-technology sources of news dominate technology news, with wage markup news shocks accounting for about 60% of the variance share of both hours and ination. We find that in the estimated DSGE model (a) the presence of endogenous countercyclical price and wage markups due tonominal frictions substantially diminishes the importance of news shocks relative to a model without these frictions, and (b) while there is little change in the estimated contributions of technology news when we restrict wealth effects on labour supply, the contributions of non-technology news shocks are relatively more sensitive.

Keywords: News shocks; Business cycles; DSGE models (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2009-09-22, Revised 2012-05-22
New Economics Papers: this item is included in nep-bec, nep-cba, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (139)

Published: Revised version in Journal of Money, Credit and Banking, Vol. 44, No. 8 (December 2012), pp. 1535–1561

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Related works:
Journal Article: The Quantitative Importance of News Shocks in Estimated DSGE Models (2012)
Journal Article: The Quantitative Importance of News Shocks in Estimated DSGE Models (2012)
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