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Discussion Paper Details

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Title: No News in Business Cycles

Author(s): Mario Forni, Luca Gambetti and Luca Sala

Publication Date: February 2011

Keyword(s): fundamentalness, invertibility, news shocks and structural factor model

Programme Area(s): International Macroeconomics

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 is explained by shocks unrelated to technology.

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Bibliographic Reference

Forni, M, Gambetti, L and Sala, L. 2011. 'No News in Business Cycles'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=8274