News and Financial Intermediation in Aggregate Fluctuations

Christoph Görtz and John Tsoukalas

MPRA Paper from University Library of Munich, Germany

Abstract: We develop a two-sector DSGE model with financial intermediation to investigate the role of news as a driving force of the business cycle. We find that news about future capital quality is a significant source of aggregate fluctuations, accounting for around 37% in output variation in cyclical frequencies. Financial intermediation is essential for the importance and propagation of capital quality shocks. In addition, news shocks in capital quality generate aggregate and sectoral comovement as in the data and is consistent with procyclical movements in the value of capital. From a historical perspective, news shocks to capital quality are to a large extent responsible for the recession following the 1990s investment boom and the latest recession following the financial crisis, but played a much smaller role during the recession at the beginning of the 1990s. This is in line with the belief that revisions of overoptimistic expectations contributed to the last two recessions while movements in fundamentals played a much bigger role for the recession at the beginning of the 1990s.

Keywords: News; Anticipation effects; Business cycles; DSGE; Bayesian estimation (search for similar items in EconPapers)
JEL-codes: E2 E3 (search for similar items in EconPapers)
Date: 2011-03, Revised 2011-10
New Economics Papers: this item is included in nep-bec, nep-cba, nep-cis, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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https://mpra.ub.uni-muenchen.de/34113/1/MPRA_paper_34113.pdf original version (application/pdf)
https://mpra.ub.uni-muenchen.de/37373/1/MPRA_paper_37373.pdf revised version (application/pdf)

Related works:
Journal Article: News and Financial Intermediation in Aggregate Fluctuations (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:34113

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