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American Economic Review: Vol. 103 No. 7 (December 2013)

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News, Noise, and Fluctuations: An Empirical Exploration

Article Citation

Blanchard, Olivier J., Jean-Paul L'Huillier, and Guido Lorenzoni. 2013. "News, Noise, and Fluctuations: An Empirical Exploration." American Economic Review, 103(7): 3045-70.

DOI: 10.1257/aer.103.7.3045

Abstract

We explore empirically models of aggregate fluctuations in which consumers form anticipations about the future based on noisy sources of information and these anticipations affect output in the short run. Our objective is to separate fluctuations due to changes in fundamentals (news) from those due to temporary errors in agents' estimates (noise). We show that structural VARs cannot be used to identify news and noise shocks, but identification is possible via a method of moments or maximum likelihood. Next, we estimate our model on US data. Our results suggest that noise shocks explain a sizable fraction of short-run consumption fluctuations.

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Authors

Blanchard, Olivier J. (IMF)
L'Huillier, Jean-Paul (EIEF, Rome)
Lorenzoni, Guido (Northwestern U)

JEL Classifications

D84: Expectations; Speculations
E13: General Aggregative Models: Neoclassical
E21: Macroeconomics: Consumption; Saving; Wealth
E32: Business Fluctuations; Cycles


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