The Expectational Effects of News in Business Cycles: Evidence from Forecast Data
Wataru Miyamoto and Thuy Lan Nguyen
"The Expectational Effects of News in Business Cycles: Evidence from Forecast Data"
News shocks work through changes in expectations, so data on expectations contain important information for identification of news shocks. We demonstrate this by estimating a DSGE model augmented with news shocks using U.S. data between 1955Q1 and 2006Q4. News shocks, especially those with long anticipation horizons, generate modest output fluctuations before fundamental changes. The precision of the estimated news shocks greatly improves when data on expectations are used. These results arise because data on expectations are smooth and do not resemble actual output.