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Barcelona GSE Working Paper No. 535

Title: No News in Business Cycles
Authors: Mario Forni, Luca Gambetti, and Luca Sala
Date: 21-02-2011
Keywords: structural factor model, news shocks, invertibility, fundamentalness
JEL Codes: C32, E32, E62
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 are explained by shocks unrelated to technology.
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