Abstract
A news-driven business cycle is a positive comovement of consumption, output, labor, and investment from the news about the future. We show that nominal rigidities, especially sticky prices, can cause it in a medium-scale DSGE economy through countercyclical movements of the price-markup. We also find that sticky wages cannot generate it, but they amplify the effects of news shocks.
Highlights
A news-driven business cycle is a positive comovement of consumption, labor, investment, and output from a news shock about future productivity.It is well known that the standard real business cycle model cannot generate it
We show that nominal rigidities, especially sticky prices, can cause it in a medium-scale DSGE economy through countercyclical movements of the price-markup
We employ the model of Fujiwara, Hirose, and Shintani [7], which is an estimated medium-scale DSGE economy a la Smets and Wouters [8] with news shocks
Summary
A news-driven business cycle (hereafter, NDBC) is a positive comovement of consumption, labor, investment, and output from a news shock about future productivity. We focus on nominal rigidities as sources of NDBCs. We employ the model of Fujiwara, Hirose, and Shintani [7], which is an estimated medium-scale DSGE economy a la Smets and Wouters [8] with news shocks. It is shown that NDBCs are generated because of nominal rigidities, especially sticky prices. This paper is closely related to the one by Kobayashi and Nutahara [6] They show that sticky prices and wages can be sources of NDBCs using a simple model theoretically. We show that sticky prices are important sources of NDBCs in a widely used model with estimated parameter values, but sticky wages are not.
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