Evidence on News Shocks under Information Deficiency

Abstract

News shocks about future productivity can be correctly inferred from a conventional VAR model only if information contained in observables is rich enough. This paper examines news shocks by means of a noncausal VAR model that recovers economic shocks from both past and future variation. As noncausality is implied by nonfundamentalness, the model solves the problem of insufficient information per se. By the impulse responses derived from the model, variables react to the anticipated structural shocks, which are identified by exploiting future dependence of investment with respect to productivity. In the U.S. economy, news shocks move investment and stock prices on impact, but these responses are likely affected by a parallel increase in productivity. News shocks are characterised by gradual diffusion to productivity and generate smooth reactions of forward-looking variables.