By Christoph Görtz and John Tsoukalas
We estimate a two-sector DSGE model with financial intermediaries – a-la Gertler and Karadi (2011) and Gertler and Kiyotaki (2010) – and quantify the importance of news shocks in accounting for aggregate and sectoral fluctuations. Our results indicate a significant role of financial market news as a predictive force behind fluctuations. Specifically, news about the value of assets held by financial intermediaries, reflected one to two years in advance in corporate bond markets, generate countercyclical corporate bonds spreads, affect the supply of credit, and are estimated to be a significant source of aggregate fluctuations, accounting for approximately 31% of output, 22% of investment and 31% of hours worked variation in cyclical frequencies. Importantly, asset value news shocks generate both aggregate and sectoral co-movement with a standard preference specification. Financial intermediation is key for importance and propagation of asset value news shocks.
Another paper that tries to introduces news shocks into some form of a standard model. The interesting aspect here is the quantification. Yet, I have the feeling that what is called news here may incorporate a lot more. For example, when there is herd behavior that drives assets prices one way or another, that is likely picked up as a news shock. Is that right? Or are news shocks capturing something that the econometrician does not observe, but market participants do, and it may even be a realized fundamental. Maybe I am just confused by a long day (see the RePEc blog tomorrow why).