Shock persistence, uncertainty, and news-driven business cycles

Abstract

This paper distinguishes news about short-lived events from news about changes in longer term prospects using surveys of expectations. Employing a multivariate GARCH-in-Mean model for the US, the paper illustrates how the different types of news influence business cycle dynamics. The influence of transitory output shocks can be relatively large on impact but gradually diminishes over two to three years. Permanent shocks drive the business cycle, generating immediate stock price reactions and gradually building output effects, although they have more immediate output effects during recessions through the uncertainties they create. Markedly different macroeconomic dynamics are found if these e..