International Finance Discussion Papers (IFDP)
Forecast Revisions as Instruments for News Shocks
Upon arrival of macroeconomic news, economic agents update their beliefs about the long-run fundamentals of the economy. I show that signals about the agents’ long-run expectations, proxied by the economic outlook revisions of professional forecasters, convey sufficient information to identify the effects of expected future technological changes, or news shocks. A major advantage of this approach from the existing news shock literature is that it does not depend on an empirical measure for technology, or on assumptions about common trends and timing of the technological change. I show that technological news shocks cause a strong anticipation effect in investment and an increase in hours, while there is less evidence of consumption smoothing over time---in line with news-driven business cycle models featuring a key role of financial frictions.
Keywords: instrumental variable, news shock, professional forecasts, proxy SVAR
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