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Measuring the effects of expectations shocks

Clements, M. P. ORCID: https://orcid.org/0000-0001-6329-1341 and Galvao, A. B. (2021) Measuring the effects of expectations shocks. Journal of Economic Dynamics and Control, 124. 104075. ISSN 0165-1889

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To link to this item DOI: 10.1016/j.jedc.2021.104075

Abstract/Summary

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:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:95511
Publisher:Elsevier

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