Estimating Macroeconomic News and Surprise Shocks

Abstract
The importance of understanding the economic effects of TFP news and surprise shocks is widely recognised in the literature. This paper examines the ability of the state-of-the-art VAR approach in Kurmann and Sims (2021) to identify responses to TFP news shocks and possibly surprise shocks in theory and practice. When applied to data generated from DSGE models with shock processes that match key TFP moments, this estimator tends to be strongly biased, both in the presence of TFP measurement error and in its absence. Incorporating a measure of TFP news into the VAR model and adapting the identification strategy substantially reduces the bias and RMSE of the impulse response estimates, regardless of whether TFP is measured with error, and even when there is substantial measurement error in the news variable. Applying the news-based identification methods to the data, we find that news shocks play an important role at long horizons, but a much smaller role than implied by the state-of-the-art method. Joint with with A. Richter and M. Plante.

Registration
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