Abstract
Recent research in DSGE and VAR models has indicated that the most important drivers of business cycles are IST shocks, not traditional TFP and other shocks. Research in VAR models has also empirically identified IST news shocks as a significant driving force behind the U.S. business cycle. However, recent New-Keynesian DSGE models have found that IST news shocks do not produce comovement of aggregate variables, with the share of the forecast error variance explained by IST news shocks being very small in a flexible-price model and essentially zero in a sticky-price model. This paper uses the Bayesian methods to estimate the parameters and shock processes to study the business cycle effects of IST news shocks in a two-sector sticky-price DSGE model with consumer durables and collateral constraints. Our variance decompositions indicate that IST news shocks are a more relevant source of uncertainty than IST non-news and other shocks.
Published Version
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