What׳s news in News? A cautionary note on using a variance decomposition to assess the quantitative importance of news shocks |
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| Institution: | 1. Ruđer Bošković Institute, Bijenička 54, 10000 Zagreb, Croatia;2. Max Planck Institute for Chemical Energy Conversion, Stiftstrasse 34-36, 45470 Mülheim an der Ruhr, Germany;1. Department of Economics, Université du Quebec à Montréal, PO Box 8888, Downtown Station, Montreal, H3C 3P8, 514-987-3000, Canada;2. Department of Economics, University of Notre Dame, 3060 Jenkins Nanovic Hall, Notre Dame, IN 46556, 574-631-6309, USA;3. Department of Economics, ESG UQAM 5-280 Front, Gatineau, Montreal, Quebec, H3C 3P8, PO Box 8888 Québec, J9H0B3, 514-334-1175, Canada |
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| Abstract: | This paper points out a conceptual difficulty in using a variance decomposition to assess the quantitative importance of news shocks. A variance decomposition will attribute to news shocks movements in endogenous variables driven both by news about future exogenous fundamentals that has yet to materialize (what I call “pure news”) as well as movements driven by realized changes in fundamentals that were anticipated in the past (what I call “realized news”). I present a stylized model in which news about yet unrealized changes in fundamentals is irrelevant for output dynamics, but in which a variance decomposition may nevertheless attribute a large share of the variance of output to news shocks. I then revisit the quantitative importance of news in the model of Schmitt-Grohe and Uribe (2012). In their model news shocks account for 40 percent of the variance of output growth, but this is mostly driven by realized news. |
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| Keywords: | News shocks Variance decomposition |
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