We implement a new approach for the identification of "news shocks" about future technology. In a VAR featuring a measure of aggregate technology and several forward-looking variables, we identify the news shock as the shock orthogonal to technology innovations that best explains future variation in technology. In the data, news shocks account for the bulk of low frequency variation in technology. News shocks are positively correlated with consumption, stock price, and consumer confidence innovations, and negatively correlated with inflation innovations. The disinflationary nature of news shocks is consistent with the implications of sensibly modified versions of a New Keynesian model.
We are grateful to Rudi Bachmann, Susanto Basu, John Cochrane, Daniel Cooper, Lutz Kilian, Matthew Shapiro, and seminar participants at the University of Michigan for helpful comments and discussions. We thank John Fernald for providing us with his TFP data. All remaining errors are our own. Barsky acknowledges support from the Russell Sage Foundation as a visiting scholar, and Sims acknowledges the support of theHorace H. Rackham School of Graduate Studies at the University of Michigan.
The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
"News Shocks and Business Cycles" with Bob Barsky, April 2011, pdf, Journal of Monetary Economics 58(3), 273-289.