By Paul Beaudry and Franck Portier
There is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations. The news view of business cycles offers a formalization of this perspective. In this paper we discuss mechanisms by which changes in agents’ information, due to the arrival of news, can cause business cycle fluctuations driven by expectational change, and we review the empirical evidence aimed at evaluating its relevance. In particular, we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations, while at the same time we emphasize the many challenges that must be addressed before a proper assessment of its role in business cycles can be established.
If you are interested in how news and expectations in general matter for the business cycle, this is a must read. Beaudry and Portier have been very influential in getting this literature moving with modern methods. Much like the topic, the paper is also forward-looking in the sense that it opens all sorts of avenues that merit exploration.