Data Management

No News In Business Cycles

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Executive Summary

This paper uses a structural, large dimensional factor model to evaluate the role of 'News' shocks (shocks with a delayed effect on productivity) in generating the business cycle. The authors find that existing small-scale VECM models are affected by 'Non-fundamentalness' and therefore fail to recover the correct shock and impulse response functions; news shocks have a limited role in explaining the business cycle; their effects are in line with what predicted by standard neoclassical theory; the bulk of business cycle fluctuations are explained by shocks unrelated to technology.

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