No News in Business Cycles

  • Authors: Luca Gambetti.
  • BSE Working Paper: 110026 | September 15
  • Keywords: Structural factor model , fundamentalness , news shocks , invertibility
  • JEL codes: C32, E32, E62
  • Structural factor model
  • fundamentalness
  • news shocks
  • invertibility
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Abstract

This paper uses a structural, large dimensional factor model to evaluate the role of ‘news’ shocks (shocks with a delayed effect on productivity) in generating the business cycle. We find that (i) existing small-scale VECM models are affected by ‘non-fundamentalness’ and therefore fail to recover the correct shock and impulse response functions; (ii) news shocks have a limited role in explaining the business cycle; (iii) their effects are in line with what predicted by standard neoclassical theory; (iv) the bulk of business cycle fluctuations are explained by shocks unrelated to technology.

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