Shock persistence, uncertainty and news-driven business cycles

Author name: 
Lee K
Shields K
Turnip G

This paper considers the macroeconomic effects of shocks with different persistence properties identified from surveys of expectations. Using a GARCH-in-Mean model for the US, we present persistence profiles to illustrate how news about events occurring over different time frames plays different roles in explaining output fluctuations in different circumstances. For example, short-lived ‘noise’ shocks have little influence on output beyond their contemporaneous impact, either directly or via the uncertainty they create. But agents recognise the importance of ‘fundamental’ permanent shocks and these drive the news-driven business cycle, generating immediate stock price reactions and gradually building output effects but also having more immediate effects on output during recessions because of the uncertainties they create.

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