Abstract

We study identifying restrictions that allow news and noise shocks to be recovered empirically within a Bayesian structural VARMA framework. In population, the identification scheme we consider exactly recovers news and noise shocks. Monte Carlo evidence further demonstrates its excellent performance, as it recovers the key features of the postulated data-generation process—the real-business cycle model of Barsky and Sims (2011) augmented with noise shocks about future total factor productivity (TFP)—with great precision. In an empirical application, evidence suggests that TFP noise shocks play a minor role in macroeconomic fluctuations.

Highlights

  • Noise shocks–defined as announcements about future fundamentals which, never materialize–offer the possibility of generating macroeconomic fluctuations without any variation in the economy’s fundamentals

  • In all of these we find that, contrary to previous findings in the literature, noise shocks play a minor role in macroeconomic fluctuations

  • Working with the real business cycle (RBC) model with noise shocks about Total Factor Productivity (TFP), we provide a straightforward illustration of how the impulse response functions (IRFs) to news and noise shocks, and the fractions of forecast error variance (FEV) of the variables they explain, can be exactly recovered in population by imposing the model-implied restrictions that ( ) news and noise shocks produce identical impulse vectors on impact, and ( ) news and non-news shocks are the only disturbances having a permanent impact on TFP

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Summary

Introduction

Noise shocks–defined as announcements about future fundamentals which, never materialize–offer the possibility of generating macroeconomic fluctuations without any variation in the economy’s fundamentals. They are radically different from news shocks, i.e. announcements about future fundamentals which do materialize at some future date. We develop a new identification scheme which, in population, exactly recovers news and noise shocks, and show that Chahrour and Jurado’s (2018) claim is not generally valid. We use our methods in several empirical applications In all of these we find that, contrary to previous findings in the literature, noise shocks play a minor role in macroeconomic fluctuations

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