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News Shocks and Asset Prices

Lorenzo Bretscher, Andrea Tamoni and Aytek Malkhozov
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Lorenzo Bretscher: London Business School
Andrea Tamoni: London School of Economics
Aytek Malkhozov: Federal Reserve Board

No 100, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We examine the role of expectation, or news, shocks for the measurement of macroeconomic risk and the natural rate of interest. To this end, we estimate a New-Keynesian dynamic stochastic general equilibrium model that allows us to infer agents’ expectations about future fundamentals at different horizons. Accounting for news shocks results in better-specified macroeconomic risk factors that have significant explanatory power for the cross-section of stock and long-term bond returns. Further, anticipated changes in future productivity growth induce sizeable fluctuations in the natural rate of interest, which we show to have important implications for the conduct of monetary policy.

Date: 2019
New Economics Papers: this item is included in nep-dge and nep-mac
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