News Driven Business Cycles: Insights and Challenges

Abstract

There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents' information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established.

News and Financial Intermediation in Aggregate Fluctuations

“…The empirical evaluation of the news driven view of business cycles has been challenging on both modelling and econometric front (see Beaudry and Portier (2014)). DSGE models, despite incorporating model frictions that in theory allow TFP news shocks to matter, estimate them to be un-important as sources of business cycles.…”

“…Despite its intuitive appeal, this view has faced several empirical challenges (see Beaudry and Portier (2014) for a survey).…”

“…Beaudry and Portier (2014) illustrate the difficulties of standard models to generate co-movement in response to news shocks. Jaimovich and Rebelo (2009) propose a solution based on preferences that can produce a positive labor supply shift with a concurrent increase in consumption.…”

Investment Hangover and the Great Recession

“…The Hayekian mechanism …nds another modern formulation in the recent literature on news-driven business cycles. A strand of this literature argues that positive news about future productivity can generate investment booms, occasionally followed by liquidations if the news is not realized (see Beaudry and Portier (2013) for a review). This literature typically generates business cycles from supply side considerations (see, for instance, Beaudry and Portier (2004), Jaimovich and Rebelo (2009)), whereas we emphasize a demand side channel.…”

Measuring nonfundamentalness for structural VARs

“…Sims (2012), Beaudry and Portier (2013) and Beaudry et al (2015) show that there are applications in which invertibility failures are mild and VARs remain a useful tool. Beaudry et al (2015) derive a R 2 diagnosis based on the fact that under fundamentalness the innovations to the econometrician information set do not correlate with the past of the factors (and of the innovations to agents' information set).…”