nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2017‒07‒16
25 papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Demand, Markups and the Business Cycle. Bayesian Estimation and Quantitative Analysis in Closed and Open Economies By Lilia Cavallari; Federico Etro
  2. A note on automation, stagnation, and the implications of a robot tax By Gasteiger, Emanuel; Prettner, Klaus
  3. A shadow rate New Keynesian model By Ji Zhang; Jing Cynthia Wu
  4. Fiscal policy shocks and stock prices in the United States By Konstantinos Theodoridis; Haroon Mumtaz
  5. The Global Factor in Neutral Policy Rates: Some Implications for Exchange Rates, Monetary Policy, and Policy Coordination By Richard H. Clarida
  6. Ramsey-optimal Tax Reforms and Real Exchange Rate Dynamics By Stephane Auray; Aurelien Eyquem; Paul Gomme
  7. General Equilibrium Effects of Immigration in Germany: Search and Matching Approach By Zainab IFTIKHAR; Anna ZAHARIEVA
  8. Striking a balance: optimal tax policy with labor market duality By Gilbert Mbara; Ryszard Kokoszczynski; Joanna Tyrowicz
  9. "Do Consumption Externalities Correspond to the Indivisible Tax Rates on Consumpiton?" By Yoichi Gokan
  10. Debt Hangover in the Aftermath of the Great Recession By Stephane Auray; Aurelien Eyquem; Paul Gomme
  11. Long-run Unemployment and Macroeconomic Volatility By Stefano Fasani
  12. Political (In)Stability of Social Security Reform By Krzysztof Makarski; Joanna Tyrowicz
  13. Optimal Social Assistance and Umemployment Insurance in a Life-Cycle Model of Family Labor Supply and Savings By Peter Haan; Victoria Prowse
  14. Optimal Regulation of Financial Intermediaries By Sebastian Di Tella
  15. Optimal Unconventional Monetary Policy in the Face of Shadow Banking By Philipp Kirchner; Benjamin Schwanebeck
  16. Technology Adoption, Capital Deepening, and International Productivity Differences By Chaoran Chen
  17. A Generalized Approach to Indeterminacy in Linear Rational Expectations Models By Bianchi, Francesco; Nicolò, Giovanni
  18. Should euro area countries cut taxes on labour or capital in order to boost their growth? By B. Castelletti-Font; P. Clerc; M. Lemoine
  19. The Aggregate Implications of Gender and Marriage By Mariacristina De Nardi; Fang Yang; Margherita Borella
  20. A Macro-Finance Approach to Sovereign Debt Spreads and Returns By Fabrice Tourre
  21. Occupational Choice and Matching in the Labor Market By Aloysius Siow; Eric Mak
  22. Productivity, Taxes, and Hours Worked in Spain: 1970-2015 By Conesa, Juan Carlos; Kehoe, Timothy J.
  23. Forward Guidance without Common Knowledge By George-Marios Angeletos; Chen Lian
  24. Technology Network Innovation and Distribution By Jingong Huang
  25. Revisions in Utilization-Adjusted TFP and Robust Identification of News Shocks By Eric Sims; Andre Kurmann

  1. By: Lilia Cavallari (Department of Economics, University of Rome III); Federico Etro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We generalize the demand side of a Real Business Cycle model introducing non-homothetic preferences over differentiated final goods. Under monopolistic competition this generates variable markups that depend on the level of consumption. We estimate a flexible preference specification through Bayesian methods and obtain countercyclical markups. The associated closed-economy model magnifies the propagation of shocks (compared to perfect competition or fixed markups) through additional substitution effects on labor supply and consumption. In an open-economy framework, it also generates positive comovements of output, labor and investment and reduces consumption correlation between countries: in particular, a positive shock in the Home country reduces its markups and improves its terms of trade, which promotes consumption in the Home country but also production in the Foreign country to exploit the increased profitability of exports.
    Keywords: RBC, variable markups, non-homothetic preferences, international macroeconomics
    JEL: E1 E2 E3
    Date: 2017
  2. By: Gasteiger, Emanuel; Prettner, Klaus
    Abstract: We analyze the long-run growth effects of automation in the canonical overlapping generations framework. While automation implies constant returns to capital within this model class (even in the absence of technological progress), we show that it does not have the potential to lead to positive long-growth. The reason is that automation suppresses wages, which are the only source of investment because of the demographic structure of the overlapping generations model. This result stands in sharp contrast to the effects of automation in the representative agent setting, where positive long-run growth is feasible because agents can invest out of their wage income and out of their asset income. We also analyze the effects of a robot tax that has featured prominently in the policy debate on automation and show that it could raise the capital stock and per capita output at the steady state. However, the robot tax cannot induce a takeoff toward positive long-run growth.
    Keywords: automation,robots,robot taxes,investment,stagnation,economic growth,canonical overlapping generations model,fiscal policy
    JEL: J10 J20 O14 O33 O41 E62
    Date: 2017
  3. By: Ji Zhang (Tsinghua University); Jing Cynthia Wu (University of Chicago)
    Abstract: We propose a New Keynesian model with the shadow rate, which is the federal funds rate during normal times. At the zero lower bound, we establish empirically the negative shadow rate summarizes unconventional monetary policy with its resemblance to private interest rates, the Fed's balance sheet, and Taylor rule. Theoretically, we formalize our shadow rate New Keynesian model with QE and lending facilities. Our model generates data-consistent results: a negative supply shock is always contractionary. %Relatedly, the government multiplier is under 1. It also salvages the New Keynesian model from the zero lower bound induced structural break.
    Date: 2017
  4. By: Konstantinos Theodoridis; Haroon Mumtaz
    Abstract: This paper uses a range of structural VARs to show that the response of US stock prices to fiscal shocks changed in 1980. Over the period 1955-1980 an expansionary spending or revenue shock was associated with modestly higher stock prices. After 1980, along with a decline in the fiscal multiplier, the response of stock prices to the same shock became negative and larger in magnitude. We use an estimated DSGE model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks.
    Keywords: Fiscal policy shocks, Stock prices, VAR, DSGE
    JEL: C5 E1 E6 E5
    Date: 2017
  5. By: Richard H. Clarida
    Abstract: This paper highlights some of the theoretical and practical implications for monetary policy and exchange rates that derive specifically from the presence of a global general equilibrium factor embedded in neutral real policy rates in open economies. Using a standard two country DSGE model, we derive a structural decomposition in which the nominal exchange rate is a function of the expected present value of future neutral real interest rate differentials plus a business cycle factor and a PPP factor. Country specific “r*” shocks in general require optimal monetary policy to pass these through to the policy rate, but such shocks will also have exchange rate implications, with an expected decline in the path of the real neutral policy rate reflected in a depreciation of the nominal exchange rate. We document a novel empirical regularity between the equilibrium error in the VECM representation of the empirical Holston Laubach Williams (2017) four country r* model and the value of the nominal trade weighted dollar. In fact, the correlation between the dollar and the 12 quarter lag of the HLW equilibrium error is estimated to be 0.7. Global shocks to r* under optimal policy require no exchange rate adjustment because passing though r* shocks to policy rates ‘does all the work’ of maintaining global equilibrium. We also study a richer model with international spill overs so that in theory there can be gains to international policy cooperation. In this richer model we obtain a similar decomposition for the nominal exchange rate, but with the added feature that r* in each country is a function global productivity and business cycle factors even if these factors are themselves independent across countries. We argue that in practice, there could well be significant costs to central bank communication and credibility under a regime formal policy cooperation, but that gains to policy coordination could be substantial given that r*’s are unobserved but are correlated across countries.
    JEL: E4 F31 F33
    Date: 2017–06
  6. By: Stephane Auray (CREST-Ensai and ULCO); Aurelien Eyquem (CREST-Ensai and Universite de Lyon); Paul Gomme (Concordia University and CIREQ)
    Abstract: We solve for the Ramsey-optimal path for government debt, labor income taxes and capital income taxes for a small open economy with an endogenously-determined real exchange rate. Due to the endogenous exchange rate, the model must be solved using the `primal problem': maximize the lifetime utility of the representative household subject to equilibrium conditions and the government budget constraint. The open economy constrains the government's setting of the capital income tax rate since physical capital cannot be dominated in rate of return by foreign assets. However, the endogenous real exchange rate loosens this constraint relative to a one good open economy model in which the real exchange rate is necessarily fixed.
    Keywords: Optimal fiscal policy, Tax reforms, Welfare
    JEL: E32 E52 F41
    Date: 2017–07
  7. By: Zainab IFTIKHAR (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES)); Anna ZAHARIEVA (Center for Mathematical Economics, Bielefeld University)
    Abstract: In this study we develop and calibrate a search and matching model of the German labour market and analyze the impact of recent immigration. Our model has two production sectors (manufacturing and services), two skill groups and two ethnic groups of workers (natives and immigrants). Moreover, we allow for the possibility of self-employment, endogenous price and wage setting and fiscal redistribution policy. We find that search frictions are less important for wages of the low skilled, especially in manufacturing, whereas wages of the high skilled are more sensitive to their outside opportunities. Furthermore, employment chances of immigrant workers are up to four times lower than employment chances of native workers, especially in the high skill segment. Our results show that recent immigration to Germany, including refugees, has a moderate negative effect on the welfare of low skill workers in manufacturing (-0.6%), but all other worker groups are gaining from immigration, with high skill service employees gaining the most (+4.3%). This is because the productivity of high (low) skill workers is increasing (decreasing) and there is a higher demand for services. The overall effect of recent immigration is estimated at +1.6%. Finally, we observe that productive capacities of immigrant workers are underutilized in Germany and a policy implementing equal employment opportunities can generate a welfare gain equal to +0.9% with all worker groups (weakly) gaining due to the redistribution.
    Keywords: search frictions, immigration, general equilibrium, redistribution, welfare
    JEL: J23 J31 J38 J64
    Date: 2016–09–22
  8. By: Gilbert Mbara (Group for Research in Applied Economics (GRAPE)); Ryszard Kokoszczynski (University of Warsaw; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw)
    Abstract: We develop a dynamic general equilibrium model in which firms may evade the employer contribution component of social security taxes by offering some workers "secondary contracts". When calibrated, the model yields estimates of secondary labor market participation consistent with empirical evidence for the EU14 countries and the US. We investigate the optimal mix of the avoidable and unavoidable components of labor taxes and analyze the fiscal and macroeconomic effects of bringing the composition to the welfare optimum. We find that partial labor tax evasion makes tax revenues more elastic, but full tax compliance need not be a welfare enhancing policy mix.
    Keywords: Laffer curve, tax evasion, labor market duality
    JEL: H2 H26 H3 E13 E26 J81
    Date: 2017
  9. By: Yoichi Gokan (Faculty of Economics, Ritsumeikan University)
    Abstract: This paper puts the apperantly di¤erent distortions of consumption externalities and endogenous consumption taxes to work in the one-sector Ramsey model without any distortions. We will prove that the two distortions can have similar or possibly exact same dynamic impacts on the aggregate economy, only if we use very familiar preferences in macro-dynamic literature. These two distortions ana- lytically have a very close similarity as the obstacle distorting a market equilibrium path and consumption externalities seem the invisible tax rates (transefer rates) on consumption for positive (negative) external e¤ects.
    Date: 2017–03
  10. By: Stephane Auray (CREST-Ensai and Universite du Littoral Cote d'Opale); Aurelien Eyquem (CREST-Ensai, GATE, UMR 5824, Universite de Lyon, and Universite Lumiere Lyon 2); Paul Gomme (Concordia University and CIREQ)
    Abstract: Following the Great Recession, U.S. government debt levels exceeded 100% of output. We develop a macroeconomic model to evaluate the role of various shocks during and after the Great Recession; labor market shocks have the greatest impact on macroeconomic activity. We then evaluate the consequences of using alternative fiscal policy instruments to implement a fiscal austerity program to return the debt-output ratio to its pre-Great Recession level. Our welfare analysis reveals that there is not much difference between applying fiscal austerity through government spending, the labor income tax, or the consumption tax; using the capital income tax is welfare-reducing.
    Keywords: fiscal policy; fiscal austerity; Great Recession
    JEL: E62 H63 E24
    Date: 2017–06
  11. By: Stefano Fasani (University of Rome "Tor Vergata")
    Abstract: This paper develops a DSGE model with downward nominal wage rigidity, in which aggregate price and productivity dynamics are exogenously determined by independent Brownian motions with drift. As a result, the long-run expected value of unemployment depends positively on the drift coe¢ cients and negatively on the volatility coe¢ cients of both price and productivity growth processes. Model prescriptions are empirically tested by using a dataset including a wide sample of OECD countries from a period spanning from 1961 to 2011. Panel regressions with fixed effects and time dummies confirm the expected relation of inflation and productivity with unemployment at low frequencies. Long-run unemployment is negatively correlated with the levels of inflation and productivity growth, and positively with their volatilities.
    Keywords: Long-run unemployment, Downward Nominal Wage Rigidity, Volatility, In?ation targeting, DSGE model, Cross-country panel data.
    JEL: E12 E24 E31 C23
    Date: 2017–07–07
  12. By: Krzysztof Makarski (Group for Research in Applied Economics (GRAPE); Warsaw School of Economics; Narodowy Bank Polski); Joanna Tyrowicz (Group for Research in Applied Economics (GRAPE); University of Warsaw)
    Abstract: We analyze the political stability social security reforms which introduce a funded pillar (a.k.a. privatizations). We consider an economy populated by overlapping generations, which introduces a funded pillar. This reform is efficient in Kaldor-Hicks sense and has political support. Subsequently, agents vote on abolishing the funded system and replacing it with the pay-as-you-go scheme, i.e. “unprivatizing” the pension system. We show that even if abolishing the system reduces welfare in the long run, the distribution of benefits across cohorts along the transition path implies that “unprivatizing” social security is always politically favored. This suggests that property rights definition over retirement savings may be of crucial importance for determining the stability of retirement systems with a funded pillar.
    Keywords: majority voting, pension system reform, welfare
    JEL: H55 D72 C68 E17 E27
    Date: 2017
  13. By: Peter Haan; Victoria Prowse
    Abstract: We analyze empirically the optimal mix and optimal generosity of social insurance and assistance programs. For this purpose, we specify a structural life-cycle model of the labor supply and savings decisions of singles and married couples. Partial insurance against wage and employment shocks is provided by social programs, savings, and the labor supplies of all adult household members. We show that the optimal policy mix focuses mainly on social assistance, which guarantees a permanent universal minimum household income, with a minor role for temporary earnings-related unemployment insurance. Optimal social assistance is moderately generous. Re ecting that married couples obtain intra-household insurance by making labor supply choices for both spouses, we also show that the optimal generosity of social assistance is decreasing in the proportion of married individuals in the population.
    Keywords: Unemployment insurance; Social assistance; Design of bene t programs; Life-cycle labor supply; Family labor supply; Intra-household insurance; Household savings; Employment risk; Added worker e ect.
    JEL: J18 J68 H21 I38
    Date: 2017–05
  14. By: Sebastian Di Tella (Stanford GSB)
    Abstract: I characterize the optimal financial regulation policy in an economy where financial intermediaries trade capital assets on behalf of households, but must retain an equity stake for incentive reasons. Financial regulation is necessary because intermediaries cannot be excluded from privately trading in capital markets. They don’t internalize that high asset prices force everyone to bear more risk. The socially optimal allocation can be implemented with a tax on asset holdings, or equivalently, reserve requirements. I derive a simple formula for the externality/optimal policy in terms of observable variables, valid for heterogenous intermediaries and asset classes, and arbitrary aggregate shocks. I use market data on leverage and volatility of intermediaries’ equity to measure the externality, which co-moves with the business cycle.
    Date: 2017
  15. By: Philipp Kirchner (University of Kassel); Benjamin Schwanebeck (University of Kassel)
    Abstract: Using a DSGE framework, we discuss the optimal design of monetary policy for an economy where both retail banks and shadow banks serve as fi?nancial intermediaries. We get the following results. During crises times, a standard Taylor rule fails to reach sufficient stimulus. Direct asset purchases prove to be the most effective unconventional tool. When maximizing welfare, central banks should shy away from interventions in the funding process between retail and shadow banks. Liquidity facilities are the welfare-maximizing unconventional policy tool. The effectiveness of unconventional measures increases in the size of the shadow banking sector. However, the optimal response to shocks is sensitive to the resource costs of the implementation which may differ across central banks. Hence, optimal unconventional monetary policy is country-speci?c.
    Keywords: ?nancial intermediation; shadow banking; ?financial frictions; unconventional policy; optimal policy
    JEL: E44 E52 E58
    Date: 2017
  16. By: Chaoran Chen (University of Toronto)
    Abstract: Cross-country differences in capital intensity are larger in the agricultural sector than in the non-agricultural sector, indicating that rich and poor countries differ in agricultural technology adoption. I build a two-sector general equilibrium model featuring technology adoption in agriculture. As the economy develops, farmers gradually adopt a modern capital-intensive technology to replace the traditional labour-intensive technology, as is observed in the U.S. historical data. Using this model, I find that the technology adoption channel is key to accounting for low agricultural capital intensity and labour productivity in poor countries. In the model, measured aggregate factors – land endowment, economy-wide productivity, and barriers to investment – can explain 1.56-fold more in rich-poor agricultural productivity differences compared to a model without technology adoption. I further show that land market frictions in agriculture impede technology adoption and magnify productivity differences.
    Date: 2017
  17. By: Bianchi, Francesco; Nicolò, Giovanni
    Abstract: We propose a novel approach to deal with the problem of indeterminacy in Linear Rational Expectations models. The method consists of augmenting the original model with a set of auxiliary exogenous equations that are used to provide the adequate number of explosive roots in presence of indeterminacy. The solution in this expanded state space, if it exists, is always determinate, and is identical to the indeterminate solution of the original model. The proposed approach accommodates determinacy and any degree of indeterminacy, and it can be implemented even when the boundaries of the determinacy region are unknown. Thus, the researcher can estimate the model by using standard packages without restricting the estimates to a certain area of the parameter space. We apply our method to simulated and actual data from a prototypical New-Keynesian model for both regions of the parameter space. We show that our method successfully recovers the true parameter values independent of the initial values.
    Keywords: Bayesian methods.; General Equilibrium; Indeterminacy; Solution method
    JEL: C19 C51 C62 C63
    Date: 2017–07
  18. By: B. Castelletti-Font; P. Clerc; M. Lemoine
    Abstract: The large imbalances within euro area have led to renew interest in tax policies that could reduce labour costs and thus improve competitiveness and growth. In this paper, we consider whether it would be more growth-enhancing for euro area countries to, instead, use capital income tax cuts.To address this issue, we focus on the open-economy dimension and make the simplifying assumption of complete insurance markets. Using a DSGE model calibrated for France within the euro area, we show that the increase in output resulting from tax cuts on capital income would indeed be higher than the increase in output resulting from tax cuts on labour, both in the short and long run. Importantly, the strong response of output to capital income tax cuts appears to be partly explained by the particularly high level of capital income taxes in France. Moreover, such tax cuts would be less efficient if they were expected to be only temporary. Finally, we illustrate our main points through a recent fiscal package implemented in France, which combines labour and capital income tax cuts. After briefly assessing this package, we find that investment and real output would have been more strongly boosted in the medium run if this package had been focused to a larger extent on reductions in capital income taxes.
    Keywords: Fiscal reforms, taxes, government spending, DSGE model.
    JEL: E62 E63 F42
    Date: 2017
  19. By: Mariacristina De Nardi (UCL, Federal Reserve Bank of Chicago, CE); Fang Yang (Louisiana State University); Margherita Borella (Unversity of Torino)
    Abstract: Wages, labor market participation, hours worked, and savings differ by gender and marital status. In addition, women and married people make up for a large fraction of the population and of labor market participants, total hours worked, and total earnings. For the most part, macroeconomists have been ignoring women and marriage in setting up structural models and by calibrating them using data on males only. In this paper we ask whether ignoring gender and marriage in both models and data implies that the resulting calibration matches well the key economic aggregates. We find that it does not and we ask whether there are other calibration strategies or relatively simple models of marriage that can improve the fit of the model to aggregate data.
    Date: 2017
  20. By: Fabrice Tourre (University of Chicago)
    Abstract: Foreign currency sovereign bond spreads tend to be higher than historical sovereign credit losses, and cross-country spread correlations are larger than their macro-economic counterparts. Foreign currency sovereign debt exhibits positive and time-varying risk premia, and standard linear asset pricing models using US-based factors cannot be rejected. The term structure of sovereign credit spreads is upward sloping, and inverts when either (a) the country's fundamentals are bad or (b) measures of US equity or credit market stress are high. I develop a quantitative and tractable continuous-time model of endogenous sovereign default in order to account for these stylized facts. My framework leads to semi-closed form expressions for certain key macro-economic and asset pricing moments of interest, helping disentangle which of the model features influences credit spreads, expected returns and cross-country correlations. Standard pricing kernels used to explain properties of US equity returns can be nested into my quantitative framework in order to test the hypothesis that US-based bond investors are marginal in sovereign debt markets. I show how to leverage my model to study the early 1980's Latin American debt crisis, during which high short term US interest rates and floating rate dollar-denominated debt led to a wave of sovereign defaults.
    Date: 2017
  21. By: Aloysius Siow (University of Toronto); Eric Mak (Shanghai University of Finance and Economics)
    Abstract: Every labor market have many occupations. Within most occupation, the distribution of earnings is single peaked and right skewed. Firm and establishment effects have large explanatory power in log earnings regressions. Within several countries, most of the recent changes in earnings inequality are due to changes in earnings inequality across firms and not within firms. The paper investigates a model of team production consistent with these findings. Workers differ by cognitive and non-cognitive skills. The labor market sorts workers into different teams and roles within teams. The model integrates the Roy model of occupational choice with Becker’s model of positive assortative matching. We use the model to quantitatively evaluate the role of increased educational attainment in reducing recent earnings inequality in Brazil.
    Date: 2017
  22. By: Conesa, Juan Carlos (Stony Brook University); Kehoe, Timothy J. (Federal Reserve Bank of Minneapolis)
    Abstract: In the early 1970s, hours worked per working-age person in Spain were higher than in the United States. Starting in 1975, however, hours worked in Spain fell by 40 percent. We find that 80 percent of the decline in hours worked can be accounted for by the evolution of taxes in an otherwise standard neoclassical growth model. Although taxes play a crucial role, we cannot argue that taxes drive all of the movements in hours worked. In particular, the model underpredicts the large decrease in hours in 1975–1986 and the large increase in hours in 1994–2007. The lack of productivity growth in Spain during 1994–2015 has little impact on the model’s prediction for hours worked.
    Keywords: Dynamic general equilibrium; Hours worked; Distortionary taxes; Total factor productivity
    JEL: C68 E13 E24 H31
    Date: 2017–07–10
  23. By: George-Marios Angeletos (MIT); Chen Lian (MIT)
    Abstract: Forward guidance—and macroeconomic policy more generally—relies on shifting expectations, not only of future policy, but also of future economic outcomes such as income and inflation. These expectations matter through general-equilibrium mechanisms. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how standard policy predictions hinge on the assumption of common knowledge. Relaxing this assumption anchors expectations and attenuates the associated general-equilibrium effects. In the context of interest, this helps lessen the forward-guidance puzzle, as well as the paradox of flexibility. More broadly, it helps operationalize the idea that policy makers may find it hard to shift expectations of economic outcomes even if they can easily shift expectations of policy.
    Date: 2017
  24. By: Jingong Huang (University of Melbourne)
    Abstract: Motivated by empirical evidence from the U.S. patent citation data on the dynamics of firms' patent portfolio development, I build a model of innovation incorporating a technology network structure. The model features firms operating in multiple technology sectors and internalising the spillovers of their own knowledge accumulation to produce patents. Two new insights emerge: The technology network is an important determinant of the patent distribution in different sectors. The growth of patents in each sector is proportional to the Eigenvector Centrality of the technology network. The model is estimated using Simulated Method of Moments and it is capable of reproducing the patent distribution observed in the data.
    Date: 2017
  25. By: Eric Sims (University of Notre Dame); Andre Kurmann (Drexel University)
    Abstract: This paper documents large revisions in a widely-used series of utilization-adjusted total factor productivity (TFP) by Fernald (2014) and shows that these revisions can materially affect empirical conclusions about the macroeconomic effects of news shocks. The results suggest that for all its improvements over a traditional Solow residual, Fernald's measure of technology may be confounded by systematic measurement error, potentially invalidating the main identifying restriction of the literature that productivity reacts to a news shock only with a lag. Building on the large empirical literature documenting the slow diffusion of new technologies, we propose an alternative identification that does not rely on this zero impact restriction and instead accounts for most of the unpredictable variation in TFP at long horizons. We interpret the resulting shock as news because it predicts sustained future productivity growth while simultaneously generating a strong impact response of technological innovation indicators and forward-looking information variables. The identification is robust to different measurement issues, including the revisions in Fernald's TFP series, and to whether news affects (true) productivity with a lag or not. When applied to U.S. data, the shock fails to generate comovement in the main macro aggregates and therefore does not constitute a main source of business cycle fluctuations. The shock nevertheless accounts for a large part of macroeconomic fluctuations at medium and longer horizons and generates sharp impact responses of inflation and asset prices.
    Date: 2017

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