DP15062 Patents, News, and Business Cycles
We exploit information in patent applications to construct an instrumental variable for the identification of technology news shocks that relaxes all the identifying assumptions traditionally used in the literature. The instrument recovers news shocks that have no effect on aggregate productivity in the short-run, but are a significant driver of its trend component. News shocks prompt a broad-based business cycle expansion in anticipation of the future increase in TFP, but only account for a modest share of fluctuations in macroeconomic aggregates at business cycle frequencies. The stock market prices-in news shocks on impact but consumer expectations, dragged down by labor market outcomes, take sensibly longer to adjust, consistent with the predictions of models of information frictions.