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No News in Business Cycles
By Mario Forni, Luca Gambetti and Luca Sala

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.

JEL classification: C32, E32, E62.
Keywords: structural factor model, news shocks, invertibility, fundamentalness.

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Last updated March 31, 2011