Author(s): Mario Forni, Luca Gambetti, Marco Lippi, Luca Sala
We investigate the role of 'noise' shocks as a source of business cycle fluctuations. To do so we set up a simple model of imperfect information and derive restrictions for identifying the noise shock in a VAR model. The novelty of our approach is that identification is reached by means of dynamic rotations of the reduced form residuals. We find that noise shocks generate hump-shaped responses of GDP, consumption and investment and account for quite a sizable fraction of their prediction error variance at business cycle horizons.
Keywords: Nonfundamentalness, SVAR, Imperfect Information, News, Noise, Business cycles
JEL codes: C32, E32, E62