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Noisy News in Business Cycles

Mario Forni (), Luca Gambetti (), Marco Lippi () and Luca Sala ()

Center for Economic Research (RECent) from University of Modena and Reggio E., Dept. of Economics "Marco Biagi"

Abstract: The contribution of the present paper is twofold. First, we show that in a situation where agents can only observe a noisy signal of the shock to future economic fundamentals, the "noisy news", SVAR models can still be successfully employed to estimate the shock and the associated impulse response functions. Identification is reached by means of dynamic rotations of the reduced form residuals. Second, we use our identification approach to investigate the role of noise and news as sources of business cycle fluctuations. We find that noise shocks, the component of the signal unrelated to economic fundamentals, generate hump-shaped responses of GDP, consumption and investment and account for a third of their variance. Moreover, news and noise together account for more than half of the fluctuations in GDP, consumption and investment

Keywords: Invertibility; Nonfundamentalness; SVAR; Imperfect Information; News; Noise; Signal; Business cycles (search for similar items in EconPapers)
JEL-codes: C32 E32 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ger and nep-mac
Date: 2014-03
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Related works:
Journal Article: Noisy News in Business Cycles (2017) Downloads
Working Paper: Noisy News in Business Cycles (2014) Downloads
Working Paper: Noisy News in Business Cycles (2014) Downloads
Working Paper: Noisy News in Business cycles (2013) Downloads
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