When Creativity Strikes: News Shocks and Business Cycle Fluctuations

Abstract

We use monthly US utility patent applications to construct an external instrument for identification of technology news shocks in a rich-information VAR. Technology diffuses slowly, and affects total factor productivity in an S-shaped pattern. Responsible for about a tenth of economic fluctuations at business cycle frequencies, the shock elicits a slow, but large and positive response of quantities, and a sluggish contraction in prices, followed by an endogenous easing in the monetary stance. The ensuing economic expansion substantially anticipates any material increase in TFP. Technology news are strongly priced-in in the stock market on impact, but measures of consumers' expectations take sensibly longer to adjust, consistent with a New-Keynesian framework with nominal rigidities, and featuring informationally constrained agents.

Rational Inattention and the Business Cycle Effects of Productivity and News Shocks

“…A signal on all elements of the state vector confounds current with expected future productivity. 41 Furthermore, we …nd that the impulse response of the optimal signal to a news shock is positive on impact (Appendix Figure 1, upper-left panel, h = 2). To simplify, the message to …rms from a positive signal realization is: "Hire and invest, productivity is either already up or about to rise (and it is not that important precisely when productivity rises).…”

The Technology-Employment Trade-Off: Automation, Industry, and Income Effects

“…The primary difference is the imposed lack of contemporaneous impact. The news shock literature has also generally found similar evidence of an initial decline in hours-worked, such that conflating the news and surprise shocks is unlikely to bias the identified technology shock in a particular direction (Barsky and Sims, 2011;Kurmann and Sims, 2017;Miranda-Agrippino et al, 2019). Note: Regression with the scaled employment response to technology shocks as the dependent variable, and a range of variables reflecting labor market frictions as the regressors.…”

“…News shocks A growing literature has explored the macroeconomic impacts of "news" about new technologies (Barsky and Sims, 2011;Beaudry and Portier, 2006;Miranda-Agrippino et al, 2019;Alexopoulos, 2011). Frequently, this literature uses the Max-Share identification approach combined with an orthogonalized "surprise" technology shock which is not anticipated.…”

Anticipation effects of protectionist U.S. trade policies

“…Regression methods are therefore better suited to remove confounding factors from TTB initiations than a purely narrative approach. This empirical strategy is in line with, e.g.,Romer and Romer (2004),Basset et al (2014),Cloyne andHürtgen (2016), andMiranda-Agrippino et al (2019). In principle, it is also similar to the estimation approach of factor-augmented VARs proposed byBernanke et al (2005), whereby the latent factors are purged of observable macroeconomic factors prior to VAR estimation.…”

“…Basset et al (2014) use bank-level responses to the Loan Officer Opinion Survey to construct an aggregate indicator of U.S. credit supply shocks, derived by adjusting bank lending standards for macroeconomic and bank-specific factors in a regression. Miranda-Agrippino et al (2019) use residual variation in U.S. utility patent applications as an external instrument for the identification of technology news shocks. My empirical strategy is in line with these papers.…”