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Measuring the effects of expectations shocks

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Clements, Michael P. and Galvão, Ana Beatriz (2021) Measuring the effects of expectations shocks. Journal of Economic Dynamics and Control, 124 . 104075. doi:10.1016/j.jedc.2021.104075 ISSN 0165-1889.

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Official URL: http://dx.doi.org/10.1016/j.jedc.2021.104075

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Abstract

We seek to improve the measurement of the dynamic causal effects of expectation shocks by addressing issues related to data uncertainty. The expectations shocks are estimated in a mixed-frequency VAR model which incorporates monthly and quarterly economic and financial indicators. The VAR is estimated on real-time data to prevent the shocks being confounded with the effects of data uncertainty. But dynamic responses are calculated using a quarterly VAR for revised data, estimated using older vintages as instruments to account for the fact that ‘true values’ of key macroeconomic variables may never be observed. We show that expectations shocks – revisions in GDP expectations unrelated to changes in current economic fundamentals and orthogonalized to other, potentially related shocks – explain 7–8% of the two-year variation of output, investment, consumption and hours. This is similar to the proportion of business-cycle variation explained by monetary shocks, for example.

Item Type: Journal Article
Subjects: H Social Sciences > HB Economic Theory
Q Science > QA Mathematics
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Econometric models, Autoregression (Statistics), Macroeconomics -- Mathematical models, Rational expectations (Economic theory)
Journal or Publication Title: Journal of Economic Dynamics and Control
Publisher: Elsevier BV
ISSN: 0165-1889
Official Date: March 2021
Dates:
DateEvent
March 2021Published
28 January 2021Available
13 January 2021Accepted
Volume: 124
Article Number: 104075
DOI: 10.1016/j.jedc.2021.104075
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Date of first compliant deposit: 17 February 2021
Date of first compliant Open Access: 28 January 2023

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